Deck 13: Completing Tests in the Sales and Collection Cycle: Accounts Receivable

Question 1

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) several days subsequent to shipments.
C) at the time the merchandise was shipped.
D) at a time other than the point at which title passed.

Answer 1

D

Question 2

When no reply to a positive confirmation is received, the auditor:

A) examines subsequent cash receipts.
B) treats the nonresponse as a misstatement.
C) examines duplicate sales invoices.
D) both A and C

Answer 2

D

Question 3

The auditor should evaluate the qualitative nature of misstatements found in a sample of debtors' confirmations:

A) only for large differences.
B) only for related party balances.
C) only for large balances.
D) regardless of the dollar amount.

Answer 3

D

Question 4

Tests of details of balances are directed to:

A) income statement accounts for all cycles.
B) balance sheet accounts for all cycles.
C) all general ledger accounts for all cycles.
D) balance sheet accounts for some cycles and income statement accounts for other cycles.

Question 5

A positive confirmation is more reliable evidence than a negative confirmation because:

A) the auditor has a document which can be used in court.
B) follow- up procedures can be performed if a response is not received from the debtor.
C) the debtor's lack of response indicates agreement with the stated balance.
D) fewer confirmations can be sent out.

Question 6

Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the auditor decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed the customer name next to each cheque listed on the deposit slip; hence, he decided that for each customer for which a confirmation was not received that he would add all amounts shown for that customer on each validated deposit slip for the two months following the balance sheet date. The major fallacy in the auditor's procedure is that:

A) checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable.
B) the deposit slip would not be received directly by the auditor as a confirmation would be.
C) by looking only at the deposit slip the auditor would not know if the payment was for the receivable at the balance sheet date or a subsequent transaction.
D) a customer may not have made a payment during the two- month period.

Question 7

The most important test of details of balances for accounts receivable is:

A) obtaining confirmations from the client's customers.
B) tracing from shipping documents to journals to the accounts receivable ledger.
C) tracing credit memos for returned merchandise to receiving room reports.
D) recalculating the aged receivables and uncollectible accounts.

Question 8

When customers do NOT respond to positive confirmation requests, auditors:

A) must examine supporting documents.
B) must rely on inquiry of client.
C) cannot express an unqualified opinion.
D) cannot complete the engagement and must issue a disclaimer.

Question 9

The most reliable evidence from confirmations is obtained when they are sent:

A) at various times throughout the year to different sections of the samples, so that the entire sample is representative of account balances scattered throughout the year.
B) several months before the year- end, so the auditor will have adequate time to perform alternate procedures if they are required.
C) as close to the balance sheet date as possible.
D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

Question 10

Analytical procedures are often done:

A) as a part of completing the audit.
B) during the planning phase.
C) when performing detailed tests.
D) all of the above

Question 11

Which of the audit objectives is performed first when doing the tests of details of balances for accounts receivable?

A) Recorded accounts receivable exist.
B) Accounts receivable in the aged trial balance agree with related master file amounts and the total is correctly added and agrees with the general ledger.
C) Accounts receivable are owned.
D) Existing accounts receivable are included.

Question 12

The client's estimate of the total amount of uncollectible receivables is represented by:

A) the bad debts expense account on the income statement.
B) the provision for doubtful debts account.
C) the accounts with credit balances in the accounts receivable subsidiary ledger.
D) footnote disclosure in the financial statements.

Question 13

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: Review the minutes of the board of directors' meetings for any indication of pledged receivables.

A) Existence
B) Presentation and disclosure
C) Rights and obligations
D) Both B and C above

Question 14

Which of the following is NOT a factor affecting sample size for confirming accounts receivable?

A) Control risk
B) Assessed detection risk
C) Type of confirmation
D) Tolerable misstatement

Question 15

The most important test for the existence/occurrence objective for accounts receivable is:

A) existence of the balances confirmed.
B) collectibility of the balances confirmed.
C) ownership of the balances confirmed.
D) internal control over balances confirmed.

Question 16

A client's failure to record a credit note could result from:

A) improper recording of sales returns.
B) improper recording of sales allowances.
C) timing differences.
D) all of the above

Question 17

The starting point for the evaluation of the allowance for doubtful debts is:

A) a review of controls related to the auditee's credit policy.
B) last year's audit findings.
C) an analysis of write- off authorisations.
D) the aged trial balance.

Question 18

It may NOT necessary for an auditor to confirm accounts receivable when:

A) the auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable.
B) the combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence.
C) accounts receivable are immaterial.
D) any one of the above three is present.

Question 19

Analytical procedures are substantive tests and, if the results of the analytical procedures are favourable, they will:

A) reduce the tests of transactions.
B) reduce the extent of tests of details of balances.
C) reduce all of the other tests.
D) reduce the extent of tests of controls.

Question 20

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

A) customer list.
B) accounts receivable ledger.
C) schedule of accounts receivable.
D) aged trial balance.

Question 21

If accounts receivable accounts with credit balances are significant, they should be:

A) reclassified as accounts payable.
B) corrected by making adjusting entries.
C) written off.
D) moved to the debit side.

Question 22

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

A) overstate working capital with no effect on the current ratio at December 31.
B) leave both working capital and the current ratio unchanged at December 31.
C) overstate both working capital and the current ratio at December 31.
D) overstate the current ratio with no effect on working capital at December 31.

Question 23

Most tests of accounts receivable and the allowance for uncollectible accounts are based on:

A) the general ledger balance of each account.
B) the results of confirmations.
C) the aged trial balance.
D) the results of analytical procedures.

Question 24

When positive confirmations have been used, it is normally desirable to account for unconfirmed balances with alternative procedures:

A) even if the amounts are small.
B) if it does not increase the audit firm's costs.
C) only if the amounts are large.
D) only if the amounts are material.

Question 25

The primary purpose of accounts receivable confirmation is to satisfy the:

A) existence objective.
B) accuracy and cutoff objectives.
C) existence and cutoff objectives.
D) existence, accuracy and cutoff objectives.

Question 26

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

A) Accounts where no reply was received to a negative confirmation request
B) Accounts with credit balances
C) Accounts that have been outstanding for a long time
D) Receivables from affiliated companies

Question 27

When positive confirmations are used, ASA 505 requires follow- up procedures for confirmations not returned by the customer. In such a situation, which of the following would NOT be classified as an alternative procedure?

A) Examine subsequent cash receipts to determine if the receivable has been paid.
B) Send a second confirmation request.
C) Examine shipping documents to verify that the merchandise was shipped.
D) Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered.

Question 28

Which one of the following would NOT be a part of the approach used in determining the reasonableness of cutoff?

A) Evaluate whether the client has established adequate procedures to ensure a reasonable cutoff.
B) Decide on the appropriate criteria for cutoff.
C) Review client's December 31 and January 2 entries for cutoff problems.
D) Test whether a reasonable cutoff was obtained.

Question 29

When the confirmation requests are returned by the customer, in many cases, they are caused by between the client's and the customer's records.

A) timing differences
B) miscommunication
C) valuation disputes
D) none of the above

Question 30

This year is the first time that, as a normal practice in a client's business, accounts receivable may be pledged, assigned, factored or sold at discount. The audit procedure which would disclose these practices would be:

A) a review of the minutes of the board of directors' meetings.
B) discussions with the client.
C) examination of correspondence files.
D) all of the above

Question 31

Cutoff misstatements occur when:

A) the auditor mistakenly asks the bank for the end- of- year bank statement instead of the statement which would include the two succeeding weeks.
B) subsequent period transactions are recorded in the current period.
C) current period transactions are recorded in the subsequent period.
D) both B and C above, but not A

Question 32

The advantage of using the negative form of confirmations is that:

A) follow- up procedures are scheduled automatically.
B) it is appropriate in all circumstances.
C) larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.
D) customer's silence proves that the balance is correct.

Question 33

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

A) confirming receivables.
B) test of transactions for shipments made but not recorded.
C) reviewing the aged trial balance.
D) reconciling the accounts receivable general ledger account with the schedule of accounts receivable.

Question 34

It is easy to test for a cash receipts cutoff error by:

A) observing the counting of cash at the balance sheet date.
B) performing a four- column proof- of- cash.
C) reconciling the bank statement.
D) tracing recorded cash receipts to bank deposits on the bank statement of a subsequent period.

Question 35

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:

A) bank confirmation.
B) positive confirmation.
C) negative confirmation.
D) management letter.

Question 36

The most commonly reported type(s) of difference in confirmation is/are:

A) goods haven't been received.
B) payment has already been made.
C) goods have been returned.
D) all of the above.

Question 37

The criterion used by most clients for determining when a sale takes place is when:

A) the goods are shipped.
B) cash is exchanged.
C) the order is received.
D) the costs are incurred.

Question 38

After items to be confirmed have been selected, the auditor must maintain control of the confirmations until:

A) the responses are received by the client with the return mail.
B) the responses are received by the auditor from the customer.
C) the sealed envelopes are provided to client's personnel to be mailed.
D) the names are provided to the client's personnel to type the envelopes.

Question 39

Testing the information on the aged trial balance for detail tie- in is a necessary audit procedure which would normally include:

A) tracing a sample of individual balances to supporting documents.
B) comparing the total of the trial balance with the general ledger accounts receivable account.
C) test footing the total column and the columns depicting the aging.
D) all of the above

Question 40

Which one of the following circumstances would indicate that negative confirmations should NOT be used on this engagement?

A) A significant portion of the total accounts receivable is represented by a small number of accounts with large balances.
B) The internal control over receivables is good.
C) The recipients are mostly businesses rather than individuals.
D) The auditor is unaware of disputed or inaccurate accounts.

Question 41

Design and perform tests of controls for the sales and collection cycle is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 42

A customer mails and records a cheque to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organisations will be different on December 31.

A) This is a timing difference.
B) This is a cutoff misstatement.
C) Both A and B
D) Neither A nor B

Question 43

to positive confirmations do NOT provide audit evidence.

A) Follow- ups
B) Nonresponses
C) Responses
D) All of the above

Question 44

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: Inquire of management whether there are any related- party loans.

A) Existence
B) Completeness
C) Classification
D) All of the above.

Question 45

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: Review accounts receivable trial balance for large and unusual receivables.

A) Existence
B) Completeness
C) Classification
D) All of the above

Question 46

Set tolerable error for accounts receivable is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 47

The use of the positive (as opposed to the negative) form of receivables confirmation is preferred when:

A) internal control surrounding accounts receivable is considered to be effective.
B) there is reason to believe a significant portion of the requests will be responded to.
C) a large number of small balances are involved.
D) there is reason to believe that a substantial number of accounts may be in dispute.

Question 48

Each auditee misstatement of accounts receivable must be analysed to determine whether it:

A) is symptomatic of fraud.
B) is consistent with the original assessed level of control risk.
C) represents a timing difference.
D) all of the above

Question 49

Assess control risk for accounts receivable is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 50

In the sales and collection cycle, the results of the tests of controls determine:

A) whether positive or negative confirmations should be used for this engagement.
B) whether assessed control risk for sales and cash receipts needs to be revised.
C) if tests of details of balances need to be performed.
D) the extent to which planned detection risk is satisfied or each accounts receivable objective.

Question 51

Recording a cash receipt that did not occur violates the existence transaction- related audit objective for the sales and collections cycle. Which balance- related audit objective for accounts receivable does it violate?

A) Existence
B) Realisable value
C) Completeness
D) Accuracy

Question 52

Which of the following would most likely be detected by an auditor's review of a client's sales cutoff?

A) Excessive sales discounts
B) Unrecorded sales for the year
C) Unauthorised goods returned for credit
D) Lapping of year- end accounts receivable

Question 53

Tests of details of balances focus on:

A) income statement accounts.
B) income and cash flow statement accounts.
C) balance sheet accounts.
D) all of the above

Question 54

The audit working papers often include a client- prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is BEST used by the auditor to:

A) test the accuracy of recorded charge sales.
B) evaluate internal control over credit sales.
C) estimate credit losses.
D) verify the validity of the recorded receivables.

Question 55

The most important test of details of balances to determine the existence of recorded accounts receivable is:

A) tracing the credits in accounts receivable to bank deposits.
B) tracing sales returns entries to credit notes issued and receiving room reports.
C) the confirmation of customers' balances.
D) tracing sales entries to shipping documents.

Question 56

Design and perform analytical procedures for accounts receivable balance is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 57

When the client's rights to accounts receivable are limited, this can be detected by:

A) confirmation with banks.
B) inquiries of the financial controller.
C) reviewing minutes of director's meetings.
D) all of the above

Question 58

If the client's internal control for recording sales returns and allowances is evaluated as effective:

A) all sales returns must be confirmed with the customer.
B) a sample of sales returns and allowances subsequent to closing date are examined
C) all sales returns must be traced to supporting documentation.
D) a larger sample is needed to verify cutoff.

Question 59

Which one of the following is NOT an accounts receivable balance- related audit objective?

A) Recorded accounts receivable exist.
B) The client has rights to accounts receivable.
C) Internal controls for accounts receivable are adequate.
D) Accounts receivable is stated at realisable value.

Question 60

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: trace accounts from the accounts receivable master file to the aged trial balance.

A) Rights and obligations
B) Cutoff
C) Completeness
D) Presentation and disclosure

Question 61

An auditor is concerned that accounts receivable may be understated resulting from sales to customers that have been omitted from both the sales journal and the accounts receivable master file. Describe the procedure(s) the auditor should perform in these circumstances.

Question 62

The following audit procedure tests primarily which balance- related audit objective for accounts receivable: Confirm accounts receivable, using positive confirmations.

A) Existence
B) Completeness
C) Classification
D) All of the above

Question 63

Describe the types of 'unusual balances' auditors are looking for when they review the accounts receivable master file.

Question 64

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

Question 65

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

Question 66

Negative confirmations are less expensive and less reliable than positive confirmations.

Question 67

For maximum reliability, accounts receivable confirmations should be sent as close to balance date as possible.

Question 68

Cutoff misstatements exist when subsequent period transactions are recorded in the current period.

Question 69

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.

Question 70

Tests of details of balances focus on testing the year- end balances of balance sheet accounts.

Question 71

If customers use voucher systems, they can confirm balance information but not individual invoices.

Question 72

Inherent risk for accounts receivable is normally assessed at the objective level, rather than at the account level.

Question 73

State the eight specific balance- related audit objectives as applied to accounts receivable.

Question 74

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

Question 75

Match five of the terms (a- k) with the descriptions provided below (1- 5):
a. accounts receivable
b. balance- related audit objectives
c. alternative procedures
d. blank confirmation form
e. cutoff misstatements
f. evidence planning worksheet
g. negative confirmation
h. positive confirmation
i. realisable value of accounts receivable
j. timing difference in an accounts receivable confirmation
k. invoice confirmation.
1. The follow- up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists and is collectible.
2. A letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount.
3. Misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period.
4. A form used to help the auditor decide whether planned detection risk for tests of details of balances should be low, medium or high for each balance- related audit objective.
5. A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance.

Question 76

In the audit of accounts receivable, list the factors that affect the planned detection risk for tests of details of balances.

Question 77

Sales returns should be recorded in the period in which the return occurs.

Question 78

If you were to perform the following audit procedure-review accounts receivable trial balance for large and unusual receivables-what balance- related audit objective would this relate to?

Question 79

It is appropriate to regard confirmations mailed but not returned by customers as significant audit evidence.

Question 80

Explain whether it is equally as important to test the cutoff for sales and cash receipts.