Deck 12: Audit of the sales and collection cycle: Tests of controls and substantive tests of transactions

Question 1

A credit note is a document indicating a reduction in the amount due from a customer.

Answer 1

True

Question 2

The sales and collection cycle involves the transfer of ownership of goods to customers and involves the conversion of services into accounts receivable.

Answer 2

True

Question 3

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

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

Answer 3

A

Question 4

A credit note is a document used internally indicating authority to write off an account receivable as uncollectible.

Question 5

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

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

Question 6

Including cash sales, every transaction and amount is ultimately included in one of two balance sheet accounts.

Question 7

The most important concern in the processing and recording cash receipts function is the possibility of theft.

Question 8

Most companies recognise sales when goods are ordered from a credit-worthy customer.

Question 9

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Australian accounting standards.

Question 10

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

A) cash receipts
B) sales on account
C) depreciation allowance
D) cash sales

Question 11

A bill of lading is a written contract of the receipt and shipment of goods.

Question 12

Documents related to the billing of customers include a bill of lading, sales invoice, uncollectible account authorisation form, and remittance advice.

Question 13

The classes of transactions in the sales and collection cycle are sales, cash receipts, sales returns and allowances, and writing off uncollectible accounts.

Question 14

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

A) write-off of uncollectible accounts
B) sales returns
C) payroll for sales staff
D) cash sales

Question 15

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

Question 16

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

Question 17

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

A) write-off of uncollectible accounts
B) depreciation expense-store equipment
C) sales returns and allowances
D) bad debt expense

Question 18

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Question 19

The prelisting of cash receipts should be prepared by the individual who has no access to cash or to accounting records.

Question 20

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) cash credits from the cash payments journal
D) bad debt expense

Question 21

Most companies recognise sales when:

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

Question 22

Which of the following business functions is mainly related to the sales and returns allowances account?

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

Question 23

Match five of the 11 terms for documents and records (a-k)with the five 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 - 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 - 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 - 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 24

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 25

Which of the following documents is mainly related to cash receipts?

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

Question 26

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Question 27

An important purpose of a remittance advice is to improve control over the custody of assets.

Question 28

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

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

Question 29

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

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

Question 30

Which of the following documents is mainly related to sales and returns?

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

Question 31

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 32

The preparation of a sales invoice is the final step in the sales and collection cycle.

Question 33

The sales and collections cycle consists of eight business functions.The first four functions result in sales transactions.Discuss each of the remaining four business functions that occur after sales transactions and identify the key documents and records involved in each of those four functions.

Question 34

The granting of credit is critical because it is the first point in the cycle at which company assets are given up.

Question 35

Which of the following documents is used to permit the immediate deposit of cash and to improve the control over the custody of assets?

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

Question 36

Which of the following business functions is mainly related to the bad debts expense account?

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

Question 37

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

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

Question 38

Which of the following is the document used as the basis for recording sales transactions and updating the accounts receivable master file?

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

Question 39

Which of the following documents is mainly related to sales?

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

Question 40

Which of the following business functions is mainly related to the allowance for doubtful debts?

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

Question 41

Which of the following is a document used to indicate to the customer the amount of a sales and payment due date?

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

Question 42

For good internal control, the credit-granting function should be separate from the sales function.

Question 43

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

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

Question 44

Which of the following is a document prepared to initiate shipment of the goods sold?

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

Question 45

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

Question 46

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

Question 47

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) monthly statement.
C) accounts receivable subsidiary ledger.
D) remittance advice.

Question 48

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

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

Question 49

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

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

Question 50

Which of the following is the most important aspect of the billing function?

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 51

Which of the following is a document prepared by the seller for recording the description, quantity, and related information for goods ordered by a customer?

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

Question 52

Explain what a sales return and allowance means.

Question 53

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

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

Question 54

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

A) accounts receivable
B) cash
C) provision for doubtful debts
D) all of the above

Question 55

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 the:

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

Question 56

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

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

Question 57

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

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

Question 58

Which of the following is the document which accompanies the customer's payment?

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

Question 59

Which of the following is a listing of the amount owed by each customer that shows how long each component part has been due?

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

Question 60

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

Question 61

State the six specific transaction-related audit objectives for sales.For each objective, identify one key internal control.Then, for each internal control, describe one common test of controls.

Question 62

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

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

Question 63

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

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

Question 64

Describe each of the six key control activities for sales.

Question 65

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) before the cash is recorded.
C) in amounts under $100.
D) after cash is recorded but before it goes to the bank.

Question 66

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

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

Question 67

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

Question 68

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 of the above
D) none of the above

Question 69

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

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

Question 70

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

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

Question 71

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

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

Question 72

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

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

Question 73

Which of the following is the appropriate test of controls for separation of duties?

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

Question 74

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 75

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

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

Question 76

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

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

Question 77

State the six specific transaction-related audit objectives for sales, and describe one common substantive test of transactions for each objective.

Question 78

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

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

Question 79

Which of the following does the auditor consider when determining the extent of reliance to be placed on internal controls?

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

Question 80

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

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