Question 1

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Accepted Answer

Tests related to the realizable value of accounts receivable are commonly performed to evaluate the adequacy of the allowance for doubtful accounts.

Question 2

Confirmation of accounts receivable provide evidence related to the existence, accuracy and cutoff objectives.

Accepted Answer

Confirmation of accounts receivable involves sending letters to customers requesting them to verify the balance owed to the company. This provides evidence related to the existence and accuracy objectives, as it confirms that the receivables actually exist and that the amount recorded on the company's books is accurate. It also helps to address the cutoff objective by ensuring that any sales made at the end of the reporting period are included in the accounts receivable balance.

Question 3

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Accepted Answer

Confirmation is a common test of details of balances used to confirm the accuracy of accounts receivable balances.

Question 4

Describe how the auditor tests the accuracy objective for accounts receivable.

Accepted Answer

The answer of Describe how the auditor tests the accuracy...

Question 5

Auditors often use analytical procedures in gathering audit evidence. For example, an unexplained decrease in the amount of accounts receivable may indicate:
A) Sales were overstated.
B) Inventory purchases were curtailed.
C) Cost of Goods sold was overstated.
D) Accounts Receivables were sold.

Accepted Answer

An unexplained decrease in accounts receivable could indicate that the receivables were sold, as this would remove them from the balance sheet without a corresponding collection of cash.

Question 6

Assuming the client's internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions.

Accepted Answer

The answer of Assuming the client's internal controls are adequate,...

Question 7

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Accepted Answer

This is generally true for merchandising and manufacturing clients who follow the accrual basis of accounting. Title passage is a key factor in determining when revenue is recognized as it signifies a transfer of ownership and control of the goods. However, there may be other factors to consider depending on the specific situation, such as delivery terms or installation requirements.

Question 8

A procedure to test for a cash receipts cutoff error is:
A) reconciling the bank statement.
B) performing a four-column proof-of-cash.
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 different period.

Accepted Answer

Tracing recorded cash receipts to bank deposits on the bank statement of a different period can help identify any cash receipts that were recorded in the wrong period, leading to a potential cutoff error. Reconciling the bank statement and performing a four-column proof-of-cash may also be useful in detecting errors, but they are not specific to testing for a cash receipts cutoff error. Observing the counting of cash at the balance sheet date may help prevent theft, but it does not specifically test for a cutoff error.

Question 9

You are auditing Rodgers and Company and have noticed that accounts receivables have increased from the previous year because of financial problems with its customers. Your likely first response would be to:
A) expand tests regarding account balance collectability.
B) increase the allowance for uncollectible accounts for the client.
C) communicate to the client that credit policy must be reviewed.
D) increase the sample size of past due accounts.

Accepted Answer

Expanding tests regarding account balance collectability would allow for a thorough examination of the collectability of the accounts receivables. This would provide the auditor with a better understanding of the risks associated with the increase in accounts receivables and allow for appropriate adjustments to be made to the allowance for uncollectible accounts. Increasing the allowance without thorough testing could lead to an overstatement of expenses and a misstatement of the financial statements. Communicating to the client may also be necessary, but expanding tests is the best course of action in this situation. Increasing the sample size of past due accounts alone would not provide enough information regarding the collectability of the accounts receivable.

Question 10

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 the time the merchandise was shipped.
C) several days subsequent to shipment.
D) at a time after the point at which title passed.

Accepted Answer

If the client’s policy is to record sales when title to the merchandise passes to the buyer, then sales should not be recorded until the merchandise has been shipped and title has passed to the buyer. Recording sales before the merchandise has been shipped would result in cutoff errors, as the sales recorded would not meet the policy criteria for recognition.

Question 11

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Accepted Answer

Tests of the presentation and disclosure-related objectives are typically performed towards the end of the audit, as the auditor would need to have a clear understanding of the financial statements and their related disclosures before testing the completeness, accuracy, and appropriateness of their presentation. This is generally done during the completion phase of the audit.

Question 12

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:
A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.

Accepted Answer

The answer of For effective internal control, employees maintaining the...

Question 13

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:
A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.

Accepted Answer

The answer of For most audits, a proper cash receipts...

Question 14

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

Accepted Answer

The answer of Cutoff misstatements can occur for sales, sales...

Question 15

When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:
A) all accounts receivable transactions for the year.
B) all sales invoices for the year.
C) all cash receipts transactions for the year.
D) all sales invoices less sales return credit memos.

Accepted Answer

The population for tests of controls and tests of transactions for sales should be all sales invoices for the year. This will enable the auditor to test the completeness, accuracy, and existence of sales transactions. Including accounts receivable transactions or cash receipts transactions would not provide sufficient information for these tests. Excluding sales return credit memos would also not provide a complete picture of sales transactions.

Question 16

How might the auditor determine whether a client has limited rights to accounts receivable?
A) 
B) 
C) 
D)

Accepted Answer

The auditor can determine whether the client has limited rights to accounts receivable by reviewing the terms of any financing agreements, loan agreements, or other contracts related to the receivables. Additionally, the auditor can perform procedures to test the collectability of the receivables and confirm whether any limitations on the client's rights to the receivables exist.

Question 17

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.

Accepted Answer

Tests of detail tie-in are typically conducted early in the audit process to verify that the details of the sales and collections cycle transactions accurately tie into the general ledger accounts, ensuring the transactions are recorded correctly.

Question 18

The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.

Accepted Answer

Realizable value and rights are balance-related audit objectives that are not impacted by assessed control risk, as they pertain to the accuracy and completeness of financial information rather than the functioning of internal controls. Therefore, the existence of control risks does not affect the auditor's ability to assess the realizability of an asset or the existence of a right.

Question 19

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:
A) accuracy.
B) existence.
C) control.
D) completeness.

Accepted Answer

The test is performed to ensure that all shipping documents have corresponding invoices, which addresses the completeness of recorded transactions.

Question 20

Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.

Accepted Answer

The answer of Discuss the audit procedures performed when testing...

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

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Confirmation of accounts receivable provide evidence related to the existence, accuracy and cutoff objectives.

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Describe how the auditor tests the accuracy objective for accounts receivable.

Auditors often use analytical procedures in gathering audit evidence. For example, an unexplained decrease in the amount of accounts receivable may indicate:

Assuming the client's internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions.

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

A procedure to test for a cash receipts cutoff error is:

You are auditing Rodgers and Company and have noticed that accounts receivables have increased from the previous year because of financial problems with its customers. Your likely first response would be to:

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:

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:

How might the auditor determine whether a client has limited rights to accounts receivable?

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.

The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.