Deck 12: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Question 1

Proper separation of duties is useful to prevent various types of misstatements. Which one of the following is NOT an essential separation of duties?

A) Separate the credit- granting function from the sales function.
B) Anyone responsible for inputting sales and cash receipts transactions information into the computer should be denied access to cash.
C) Persons having access to cash should not have access to marketable securities.
D) Personnel doing internal comparisons should be independent of those entering the original data.

Answer 1

C

Question 2

The document used as the basis for recording sales transactions and updating the accounts receivable master file is the:

A) bill of lading.
B) sales order.
C) sales journal.
D) sales transaction file.

Answer 2

D

Question 3

For the most part, the audit of the sales and collection cycle:

A) can be performed independently of the audit of other cycles.
B) cannot be performed until the audit of cash is completed.
C) must be performed first so that the audit of the other cycles can rely on the data.
D) must be performed simultaneously with the audit of the purchases and disbursements cycle.

Answer 3

A

Question 4

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 price list.
C) the amounts posted to the customer's account in the accounts receivable master file.
D) the amounts recorded in the sales journal for that transaction.

Question 5

The document which is used to permit the immediate deposit of cash and to improve the control over the custody of assets is the:

A) cash receipts journal.
B) sales invoice.
C) remittance advice.
D) credit note.

Question 6

There are five classes of transactions in the sales and collection cycle. Which is NOT one of them?

A) Cash receipts
B) Sales on account
C) Depreciation allowance
D) Cash sales

Question 7

The documents mainly related to sales and returns include:

A) cash receipt.
B) credit note.
C) customer order.
D) all of the above

Question 8

The auditor traces items from the journals back to the source documents in order to satisfy the:

A) ownership objective.
B) existence objective.
C) completeness objective.
D) valuation objective.

Question 9

It is common to test sales for proper classification as part of testing for:

A) valuation.
B) accuracy.
C) completeness.
D) cutoff.

Question 10

The most difficult type of cash theft for the auditor to detect is that which occurs:

A) out of the balance kept in a cash register.
B) in amounts under $100.
C) before the cash is recorded.
D) after cash is recorded but before it goes to the bank.

Question 11

For most firms, the function of indicating credit approval is recorded on the:

A) sales order.
B) remittance advice.
C) sales invoice.
D) customer order.

Question 12

Accounting information flows through the various accounts in the sales and collection cycle in which order? 1. Sales (cash and sales on account)
2) Cash receipts
3) Providing for doubtful debts
4) Sales returns and allowances
5) Write- off of uncollectible accounts

A) 1, 2, 3, 4, 5
B) 1, 3, 2, 4, 5
C) 1, 2, 4, 5, 3
D) 1, 2, 3, 5, 4

Question 13

Which one of the following internal control procedures would most likely prevent the concealment of a cash shortage resulting from the improper write- off of a trade account receivable?

A) Write- offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.
B) Write- offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
C) Write- offs must be authorised by company field sales employees who are in a position to determine the financial standing of the customers.
D) Write- offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.

Question 14

The listing or report generated from sales which includes the customer name, date, sales and GST amount, and whether the sale was for cash or accounts receivable, for all sales in a period is:

A) remittance advice.
B) monthly statement.
C) sales journal or listing.
D) accounts receivable master file.

Question 15

The cashier diverted cash received over the counter from a customer to his own use and wrote off the receivable as a bad debt. Select the control that should have prevented the error.

A) Receipts are given directly to the cashier by the person who opens the mail.
B) Journal entries are approved by a responsible official.
C) Remittance advices, letters or envelopes that accompany receipts are separated and given directly to the accounting department.
D) Aging schedules of accounts receivable are prepared periodically and reviewed by a responsible official.

Question 16

The auditor's assessment of control risk is a critical one because it affects the auditor's decisions about:

A) substantive tests of transactions.
B) tests of details of balances.
C) tests of controls.
D) all of the above

Question 17

Which of the following is NOT an example of an internal verification procedure?

A) Checking accuracy of document preparation
B) Checking for authorisation of transactions
C) Reviewing reports for incorrect items
D) Accounting for numerical sequence of prenumbered documents

Question 18

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit notes issued and the ending balance is the:

A) sales invoice.
B) remittance advice.
C) monthly statement.
D) accounts receivable subsidiary ledger.

Question 19

The business functions mainly related to the sales and returns allowances account include:

A) processing and recording sales returns and allowances.
B) granting credit.
C) billing customers.
D) all of the above

Question 20

To test for nonexistent transactions, the direction of audit testing should be from the:

A) externally generated documents.
B) ledger entries.
C) source documents.
D) journal entries.

Question 21

Procedures to test whether sales are accurately recorded are normally:

A) superfluous during substantive testing.
B) necessary only if the controls are weak.
C) conducted in every audit.
D) skipped unless fraud is suspected.

Question 22

Most companies recognise sales when:

A) the merchandise is received by the customer.
B) a customer order is received.
C) cash is received on account.
D) the merchandise is shipped.

Question 23

In many audits of sales transactions, no substantive tests of transactions are performed for the completeness objective because:

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

Question 24

The most important aspect(s) of the billing function is/are:

A) all shipments are billed.
B) billing is at the proper amount.
C) shipments are not billed more than once.
D) all of the above

Question 25

The customer's request for merchandise, the customer order, could be in the form of:

A) a written request by letter or on a preprinted form.
B) an oral request over the telephone or through a salesperson.
C) an electronic submission through the Internet or other network linkage.
D) any of the above three formats.

Question 26

Which one of the following is NOT one of the five classes of transactions included in the sales and collection cycle?

A) Depreciation expense-store equipment
B) Bad debt expense
C) Write- off of uncollectible accounts
D) Sales returns and allowances

Question 27

The document used to indicate to the customer the amount of a sale and payment due date is the:

A) sales order.
B) purchase order.
C) bill of lading.
D) sales invoice.

Question 28

An audit procedure which compared the name, amount and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

A) illicit write- offs of customers as uncollectible accounts.
B) lapping.
C) sales without proper credit authorisation.
D) kiting.

Question 29

One of the key internal controls to prevent invalid (fictitious) transactions in the sales and collection cycle is:

A) to include a list of customer numbers in the computer files.
B) to account for the integrity of the numerical sequence of sales orders.
C) to include the sales price list of all products in the computer files.
D) to have the bank reconciliation done by someone who is independent of the treasury function.

Question 30

If the controls necessary to satisfy any one of the objectives are inadequate, the likelihood of errors related to that objective:

A) is indeterminate.
B) may be increased if the controls for other objectives don't mitigate it.
C) is increased, regardless of the controls for the other objectives.
D) may be decreased if management is aware of the poor controls.

Question 31

The business functions mainly related to the allowance for doubtful debts account include:

A) writing off uncollectible accounts receivable.
B) granting credit.
C) billing customers.
D) all of the above

Question 32

The documents mainly related to cash receipts include:

A) credit note.
B) customer order.
C) cash receipt.
D) all of the above

Question 33

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

A) sales journal to the shipping documents.
B) sales journal to the accounts receivable ledger.
C) sales journal to the general ledger sales account.
D) shipping documents to the sales journal.

Question 34

The auditor traces items from the source documents to the journals in order to satisfy the:

A) valuation objective.
B) completeness objective.
C) existence objective.
D) ownership objective.

Question 35

The overall objective of the audit of the sales and collection cycle is to evaluate whether:

A) the sales account and the accounts receivable account are free of errors.
B) the account balances affected by the cycle are fairly presented in accordance with Australian accounting standards.
C) the sales account and the accounts receivable account are presented fairly in accordance with generally accepted accounting principles.
D) the sales account and the accounts receivable account are free of material errors.

Question 36

There are five classes of transactions in the sales and collection cycle. Which is NOT one of them?

A) Payroll for sales staff
B) Cash sales
C) Write- off of uncollectible accounts
D) Sales returns

Question 37

The appropriate test of controls for separation of duties is:

A) confirmation.
B) observation.
C) examination.
D) documentation.

Question 38

The objective of prenumbering of documents is to:

A) prevent failure to record a sale or bill.
B) prevent the issue of duplicate bills.
C) ensure documents are correctly completed.
D) both A and B

Question 39

The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:

A) cooking the books.
B) lapping.
C) kiting.
D) computer fraud.

Question 40

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 makes the daily deposit at a local bank.
B) The cashier prepares the daily deposit.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the cheques.

Question 41

Auditors can respond to deficiencies in internal control by:

A) expanding the tests of controls.
B) reassessing preliminary assessment of control risk.
C) expanding substantive tests of transactions.
D) all of the above

Question 42

The business functions mainly related to the bad debts expense account include:

A) allowing for bad and doubtful debts.
B) granting credit.
C) billing customers.
D) all of the above

Question 43

The purpose of substantive tests of transactions is to determine whether:

A) the account balances are accurate.
B) there are monetary errors or irregularities in the transactions.
C) the internal control system is working.
D) the transactions this year are reasonable compared to prior years.

Question 44

A document prepared to initiate shipment of the goods sold is the:

A) sales order.
B) customer order.
C) bill of lading.
D) sales invoice.

Question 45

The business functions mainly related to the sales account include:

A) processing customer orders.
B) granting credit.
C) billing customers.
D) all of the above

Question 46

Cash at bank, in the sales and collection cycle, will ultimately be affected by:

A) cash discounts.
B) sales returns and allowances.
C) bad debts.
D) all of the above

Question 47

Which transaction and amount in sales and collections transactions is ultimately included in balance sheet accounts?

A) Accounts receivable
B) Provision for doubtful debts
C) Cash
D) All of the above

Question 48

The business functions mainly related to the cash at bank account include:

A) processing and recording cash receipts.
B) granting credit.
C) billing customers.
D) all of the above

Question 49

Which one of the following is NOT typically included in the sales and collection cycle?

A) Sales returns and allowances
B) Allowance for doubtful debts
C) Bad debt expense
D) Cash credits from the cash payments journal

Question 50

The total of the individual account balances in the accounts receivable master file equals the:

A) total sales for the period.
B) balance of the accounts receivable account in the general ledger.
C) total sales less the total cash received for the period.
D) balance of the sales account in the general ledger.

Question 51

When designing tests of controls, the emphasis is on testing controls that:

A) are material.
B) the auditor intends to rely on to reduce control risk.
C) the auditor believes may not be functioning effectively.
D) are associated with material account balances.

Question 52

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

A) bill of lading to the supporting customer order and sales order.
B) bill of lading to the sales journal.
C) sales journal to the bill of lading.
D) sales journal to the accounts receivable subsidiary ledger.

Question 53

When designing audit procedures, the direction of tests is a crucial step in satisfying the:

A) classification objective.
B) valuation objective.
C) cutoff objective.
D) completeness objective.

Question 54

Vouching transactions from journals to source documents tests for the objective of:

A) completeness.
B) valuation.
C) existence.
D) accuracy.

Question 55

Before goods are shipped on account, a properly authorised person must:

A) verify that the unit price is accurate.
B) prepare the sales invoice.
C) approve credit.
D) approve the journal entry.

Question 56

In determining the extent of reliance to be placed on internal controls, the auditor considers:

A) effectiveness of the internal controls.
B) assessed level of control risk.
C) the costs of increased tests of controls.
D) all of the above

Question 57

A common test is to account for a sequence of various types of documents, such as duplicate sales invoices selected from the sales journal, watching for omitted and duplicate numbers or invoices outside the normal sequence. This test provides evidence of:

A) completeness.
B) existence.
C) both A and B.
D) neither A nor B.

Question 58

A document prepared by the seller for recording the description, quantity and related information for goods ordered by a customer is a:

A) remittance advice.
B) sales order.
C) bill of lading.
D) customer order.

Question 59

Which one of the following statements is TRUE? In deciding on substantive tests of transactions:

A) the materiality of the item will not influence the choice of procedures used.
B) results obtained in the prior year's audit will not affect the procedures used this year.
C) some procedures are commonly employed on every audit regardless of the circumstances.
D) all procedures are dependent on the adequacy of the controls and the results of the tests of controls.

Question 60

The documents mainly related to the sales include:

A) customer order.
B) sales invoice.
C) sales order.
D) all of the above

Question 61

Describe the substantive tests of transactions used to test the accuracy objective for sales.

Question 62

Explain what a sales return and allowance means.

Question 63

Which one of the following statements regarding the five types of audit tests in the sales and collection cycle is NOT correct?

A) Substantive tests of transactions are used both to test the effectiveness of internal controls and to test the dollar amount of these transactions.
B) Tests of details of balances are used to verify ending account balances.
C) Analytical procedures are used to test the relationships among the account balances in the cycle, both to each other and to prior years.
D) Tests of controls are used primarily to test the efficiency of internal controls over the five classes of transactions.

Question 64

It is important that sales be billed and recorded in the journal as soon as possible after:

A) shipment takes place.
B) the order is received.
C) credit is approved and it is verified that there is enough inventory to fill the order.
D) the order is received and credit is approved.

Question 65

Discuss what is meant by proof of cash receipts and explain its purpose.

Question 66

The parts of the audit most affected by the tests of controls and substantive tests of transactions for the sales and collection cycle are the balances in: 1. accounts receivable.
2) cash.
3) bad debt expense .
4) provision for doubtful debts.

A) 1, 2, 3
B) 1, 3, 4
C) 2, 3, 4
D) 1, 2, 3, 4

Question 67

Which one of the following types of cash defalcation is LEAST likely to be detected by an auditor?

A) That which involves EFT
B) That which occurs before the cash is recorded
C) Lapping
D) That which occurs after the cash is recorded but before it is deposited in the bank

Question 68

Distinguish between bad debt expense (including the provision for doubtful debts) and the write- off of bad debts.

Question 69

Which one of the following procedures would ordinarily be expected to BEST reveal unrecorded sales at the balance sheet date?

A) Trace shipping documents to the sales journal.
B) Send accounts receivable confirmation requests.
C) Trace payments received subsequent to the balance sheet date.
D) Apply gross profit rates to inventory disposed of during the period.

Question 70

Discuss the types of misstatements the auditor is concerned with when testing the existence objective for sales.

Question 71

State the five classes of transactions that comprise the sales and collection cycle.

Question 72

Match five of the terms for documents and records (a- k) with the descriptions provided below (1- 5):
a. customer order form
b. sales order
c. bill of lading
d. sales invoice
e. summary sales report
f. accounts receivable master file
g. monthly statement
h. remittance advice
i. prelisting of cash receipts
j. credit note
k. uncollectible account authorisation form.
1. A schedule prepared by an independent person when cash is received. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis.
2. A document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted.
3. A document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped and other relevant data. It is a written contract between the carrier and seller of the receipt and shipment of goods.
4. An internal document for communicating the description, quantity and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorisation for shipment.
5. A document that accompanies the sales invoice mailed to the customer, which can be returned to the seller with the cash payment.

Question 73

A listing of the amount owed by each customer that shows how long each component part has been due is the:

A) working trial balance.
B) trial balance.
C) accounts receivable trial balance.
D) aged accounts receivable trial balance.

Question 74

Proper accounting requires that an account receivable must be written off by the client when:

A) the client company concludes that an amount is no longer collectible.
B) the customer files for bankruptcy.
C) the account is at least six months old.
D) a collection agency cannot inspire customer to pay the debt.

Question 75

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Question 76

The inclusion of invalid sales in the client's accounting records leads to an:

A) understatement of assets and overstatement of income.
B) overstatement of assets and understatement of income.
C) overstatement of assets and income.
D) understatement of assets and income.

Question 77

The audit procedure referred to as proof of cash receipts is useful to test:

A) time lags in making deposits.
B) whether all recorded cash receipts have been deposited in the bank.
C) whether there are cash receipts that have not been recorded in the journals.
D) all of the above

Question 78

Which one of the following is NOT an auditor's concern about a key authorisation point in the sales/collection cycle?

A) Prices must be authorised.
B) Goods must be shipped after the authorisation.
C) The receiving room must have authorisation before releasing items to inventory control.
D) Credit must be authorised before the sale.

Question 79

The likely result of a lack of proper authorisation in the sales and collection cycle is:

A) the loss of company assets by shipping goods to fictitious customers.
B) the loss of potential revenue by billing sales at an incorrect price.
C) the loss of company assets by shipping goods to customers who fail to pay for them.
D) all of the above

Question 80

The document which accompanies the customer's payment is the:

A) sales invoice.
B) credit memo.
C) monthly statement.
D) remittance advice.