Question 1

Below are listed possible misstatements that could occur in the sales and collections cycle. Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. Overstatement of sales and accounts receivable
b. Uncollectible accounts receivable that have not been provided for
c. Overstatement of sales returns and allowances

Accepted Answer

a. compare gross margin percentage with previous year by product line; compare sales by month, (by product line), over time
b. compare bad debt expense as a percentage of sales from previous years
c. compare sales returns and allowances as a percentage of gross sales with previous years

Question 2

The net realizable value of accounts receivable is equal to:
A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.

Accepted Answer

The net realizable value of accounts receivable is the amount that is expected to be collected from accounts receivable after subtracting the estimated amount of uncollectible accounts (i.e. the allowance for doubtful accounts). Therefore, A is the correct choice as it subtracts the allowance for uncollectible accounts from the gross accounts receivable to arrive at the net realizable value.

Question 3

The audit procedure of tracing sales invoices to shipping documents will provide the auditor evidence that:
A) billed sales were shipped.
B) shipments were recorded as receivables in the subsidiary ledger.
C) the accounts receivable master file and the accounts receivable subsidiary ledger reconcile.
D) goods shipped were billed to customers.

Accepted Answer

Tracing sales invoices to shipping documents provides evidence that the goods billed to customers were actually shipped. It helps in verifying the accuracy of recorded sales transactions by ensuring that billed sales were actually delivered to the customers.

Question 4

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

Accepted Answer

The completeness transaction-related audit objective ensures that all transactions that should have been recorded are indeed recorded, while the existence balance-related audit objective ensures that balances that appear on the financial statements actually exist. These objectives address different aspects of the financial statements and do not directly affect each other.

Question 5

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

Accepted Answer

The accounts receivable balance-related audit objective of net realizable value is not affected by the assessed control risk for sales or cash receipts. This is because net realizable value is a measurement of the accounts receivable balance's estimated collectible amount, which depends on factors like customer creditworthiness and the age of the receivables. It is not impacted by the level of control risk in the sales or cash receipts process.

Question 6

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.

Accepted Answer

The occurrence transaction-related audit objective relates to ensuring that all recorded transactions have actually occurred, while the completeness balance-related audit objective relates to ensuring that all relevant transactions and balances have been recorded. Therefore, the occurrence objective affects the completeness objective in terms of ensuring that all cash receipts have been properly recorded.

Question 7

An auditor selects a sample of shipping documents in order to determine if the related sales invoices were prepared. This test would gather evidence concerning which audit objective?
A) Completeness
B) Detail tie-in
C) Occurrence
D) Realizable value

Accepted Answer

The objective of selecting a sample of shipping documents and checking if the related sales invoices were prepared is to gather evidence about completeness, which ensures that all sales transactions that should have been recorded were actually recorded.

Question 8

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:
A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.

Accepted Answer

An aged trial balance is a listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding. A customer list is a simple list of customers without their balances. An accounts receivable ledger is a detailed record of each individual customer's transactions, but it does not provide a summary of the total balances outstanding. A schedule of accounts receivable is not a commonly used term in accounting, and it is not a valid choice.

Question 9

In performing your audit you noticed that often times goods are shipped that are not matched with the corresponding sales invoice. This control deficiency could cause:
A) understatement of revenues and overstatement of inventory.
B) overstatement of revenues and understatement of inventory.
C) understatement of revenues and inventory.
D) overstatement of revenues and inventory.

Accepted Answer

If goods are shipped without a corresponding sales invoice, the revenue from those goods is not recorded, leading to an understatement of revenues. Additionally, since the goods have left inventory but are not recorded as sold, inventory is overstated.

Question 10

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

Accepted Answer

Testing transactions for shipments made but not recorded helps identify sales that have occurred but were not recorded, thus uncovering any understatement of sales and accounts receivable.

Question 11

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an:
A) efficiency basis.
B) effectiveness basis.
C) audit objectives basis.
D) none of the above.

Accepted Answer

The appropriate and sufficient evidence to be obtained from tests of details should be decided on an audit objectives basis, as the specific objectives of the audit will guide the auditor in determining the type and extent of evidence needed. Efficiency and effectiveness are important considerations, but ultimately the focus should be on meeting audit objectives.

Question 12

The two primary classes of transactions in the sales and collection cycle are:
A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.

Accepted Answer

The two primary classes of transactions in the sales and collection cycle are sales and cash receipts. Sales involve the actual sale of goods or services to customers, while cash receipts refer to the collection of payment for those sales. The other options are not the primary classes of transactions in this cycle. Sales discounts and sales returns are both subsets of sales, while accounts receivable is a result of the sales and cash receipts transactions.

Question 13

For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?
A) Timing and realizable value.
B) Completeness and existence.
C) Existence and accuracy.
D) Realizable value and cutoff.

Accepted Answer

Realizable value and cutoff are balance-related audit objectives where inherent risk for accounts receivable is typically higher due to the potential for misstatements in valuation and timing of revenue recognition.

Question 14

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?
A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Accepted Answer

The answer of For cash receipts, the occurrence transaction-related audit...

Question 15

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?
A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Accepted Answer

The answer of For sales, the occurrence transaction-related audit objective...

Question 16

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Accepted Answer

Analytical procedures are used by auditors to evaluate financial information by examining relationships among both financial and non-financial data. If the analytical procedures produce favorable results, it indicates a low risk of material misstatement and reduces the extent to which the auditor needs to test details of balances. Therefore, the statement is true.

Question 17

Which of the following types of receivables would not deserve the special attention of the auditor?
A) Accounts receivables with credit balances.
B) Accounts that have been outstanding for a long time.
C) Receivables from related parties.
D) Each of the above would receive special attention.

Accepted Answer

The answer of Which of the following types of receivables...

Question 18

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally:
A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.

Accepted Answer

Analytical procedures are used by auditors to obtain evidence regarding the financial statement assertions. If the results of the analytical procedures are favorable, then the auditor can rely on them and reduce the extent of tests of details of balances, as the substantive procedures have already provided sufficient evidence to conclude on the financial statement assertions. However, the auditor cannot reduce the extent of tests of controls or tests of transactions as these procedures are required to obtain evidence regarding the operating effectiveness of internal controls and the occurrence of transactions, respectively. Therefore, reducing all other tests is not an appropriate option.

Question 19

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

Accepted Answer

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

Question 20

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?
A) Accuracy
B) Completeness
C) Rights
D) Detail tie-in

Accepted Answer

The answer of Tests of which balance-related audit objective are...

Quiz 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

The net realizable value of accounts receivable is equal to:

The audit procedure of tracing sales invoices to shipping documents will provide the auditor evidence that:

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.

An auditor selects a sample of shipping documents in order to determine if the related sales invoices were prepared. This test would gather evidence concerning which audit objective?

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:

In performing your audit you noticed that often times goods are shipped that are not matched with the corresponding sales invoice. This control deficiency could cause:

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

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an:

The two primary classes of transactions in the sales and collection cycle are:

For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Which of the following types of receivables would not deserve the special attention of the auditor?

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally:

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

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?