Question 1

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 metering department records will provide information on all customers who are receiving electric service, and the auditor can then compare that information to the sales register to determine if all customers are being billed. The accounts receivable ledger only contains information on customers who have already been billed, so that would not help in determining if all customers are being billed.

Question 2

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

Accepted Answer

Separation of duties is an important internal control in the sales/collection cycle. The credit-granting function involves assessing the creditworthiness of customers and determining their credit limits, which should be done independently of the sales function to prevent conflicts of interest or potential fraud.

Question 3

An effective procedure to test for unbilled shipments is to trace from the:
A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.

Accepted Answer

The most effective procedure to test for unbilled shipments is to trace from the shipping documents to the sales journal. This ensures that all shipments have been properly recorded in the sales journal and subsequently invoiced to customers. Tracing from the sales journal to other records may not capture shipments that were not properly recorded.

Question 4

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the auditor.

Accepted Answer

This statement is false. While manual testing may be necessary in some circumstances, tests of controls should ideally be performed using the client's computer system, as it provides a more realistic representation of the client's internal controls and the effectiveness of those controls. However, the auditor should ensure that any testing done on the client's system is conducted in a secure, controlled manner to prevent any unintended alteration or destruction of data.

Question 5

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 6

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 are the same regardless of whether the sales were generated through traditional or e-commerce activities. These assertions include completeness, accuracy, existence, cutoff, classification, and rights and obligations.

Question 7

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 a greater concern than understatements because they can mislead financial statement users and potentially lead to higher taxes, bonuses, and dividends based on inflated figures. Therefore, it is important to ensure completeness of sales transactions to minimize the risk of overstatements.

Question 8

Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

Accepted Answer

Violations of the existence objective mean that sales recorded in the financial statements may not have actually occurred, which could lead to a misstatement of financial results. This is of greater concern than violations of the completeness objective, which may mean that some sales were not recorded, but does not necessarily result in a misstatement of financial results.

Question 9

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 10

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 11

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 12

________ 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 13

To test for recorded sales for which there were no actual shipments, the auditor vouches from the:
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Accepted Answer

To test for recorded sales for which there were no actual shipments, the auditor needs to verify if there were any corresponding shipping documents, which will confirm whether the goods were actually shipped or not. Therefore, the best choice would be to vouch from the sales journal to the shipping documents.

Question 14

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

Comparing the unit prices on the duplicate sales invoices with an approved master price list helps ensure that sales are accurately recorded at the correct prices. Comparing with original invoices, amounts recorded in the sales journal, or amounts posted to the customer's account would not necessarily ensure accuracy of pricing.

Question 15

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 helps to gather evidence that all transactions have been recorded in the journals (completeness objective). It does not provide evidence of existence (that the recorded transactions actually occurred), ownership (of the assets or liabilities involved), or valuation (of the amounts recorded).

Question 16

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 17

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 answer of Which one of the following best describes...

Question 18

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

Sales to related parties, such as officers and subsidiaries, raise concerns about the reliability and accuracy of the recorded transactions in the sales/collection cycle, and may suggest potential fraud or financial misstatement. Therefore, it is important for the auditor to design substantive tests to verify these transactions thoroughly. The other options (A, C, and D) are all types of potential misstatements that the auditor should be concerned about and design tests to uncover.

Question 19

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

Accounting for the sequence periodically ensures that all documents are accounted for and no documents are missing or used out of order. A different numerical sequence for each company is not necessary for control purposes. Allowing employees to use documents out of numerical sequence would defeat the purpose of prenumbering documents. The same numerical sequence can be used in each accounting period as long as the sequence is accounted for periodically.

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

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

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

An effective procedure to test for unbilled shipments is to trace from the:

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the 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

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

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

Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

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).

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

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

To test for recorded sales for which there were no actual shipments, the auditor vouches from the:

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

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

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

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

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

Prenumbered documents will only be useful for control purposes if:

Prenumbered documents are intended to help: