Question 1

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

Accepted Answer

Designing and performing tests of controls for the sales and collection cycle is part of Phase II of the audit, which involves assessing the design and implementation of internal controls. This phase occurs after the planning phase (Phase I) and before the substantive testing phase (Phase III). Phase IV involves evaluating the audit findings and issuing the audit report.

Question 2

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

Accepted Answer

The difference in records is due to a timing difference, as the payment was recorded in different periods for the two organizations. It is not a cutoff misstatement as the transaction was recorded in the appropriate period for each organization, but on different dates based on when they received and recorded the payment.

Question 3

to positive confirmations do NOT provide audit evidence.
A) Follow- ups
B) Nonresponses
C) Responses
D) All of the above

Accepted Answer

Nonresponses cannot be considered as audit evidence as they do not indicate either a confirmation or a denial of the information provided in the request. Follow-ups and responses can be considered audit evidence as they provide additional information and clarification on the matter being confirmed.

Question 4

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.

Accepted Answer

Inquiring about related-party loans primarily tests the classification objective, ensuring that accounts receivable are properly classified and disclosed in the financial statements.

Question 5

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

Accepted Answer

The audit procedure tests the existence objective as it confirms that the large and unusual receivables actually exist and are not fictitious.

Question 6

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

Accepted Answer

Setting tolerable error for accounts receivable is part of Phase I, which involves planning the audit and determining materiality levels.

Question 7

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.

Accepted Answer

The answer of The use of the positive (as opposed...

Question 8

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

Accepted Answer

The answer of Each auditee misstatement of accounts receivable must...

Question 9

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

Accepted Answer

The answer of Assess control risk for accounts receivable is...

Question 10

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.

Accepted Answer

The results of tests of controls in the sales and collection cycle determine whether assessed control risk for sales and cash receipts needs to be revised. This could impact the overall audit strategy, including the extent to which substantive tests, such as tests of details of balances, need to be performed. The other options are not directly related to the results of tests of controls in this cycle.

Question 11

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

Accepted Answer

Completeness is the balance-related audit objective for accounts receivable that is violated when a cash receipt that did not occur is recorded. This is because the recording of the cash receipt would result in an overstatement of accounts receivable, as the balance would include an amount that does not actually exist.

Question 12

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

Accepted Answer

A sales cutoff review involves ensuring that all sales and related transactions from the end of the year are properly recorded in the correct accounting period. Therefore, unrecorded sales for the year would be the most likely issue to be detected through this review. Excessive sales discounts, unauthorised goods returned for credit, and lapping of A/R would all require different audit procedures outside of a sales cutoff review.

Question 13

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

Accepted Answer

Tests of details of balances focus on balance sheet accounts, which include assets, liabilities, and equity.

Question 14

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.

Accepted Answer

The client-prepared, aged trial balance of accounts receivable can be used by the auditor to estimate credit losses. This aging report categorizes receivables by the length of time they have been outstanding, and the auditor can use this information to assess the likelihood of collection and determine the adequacy of the allowance for doubtful accounts. While it may be possible to use the aging report to test the accuracy of recorded sales, evaluate internal control over credit sales, or verify the validity of recorded receivables to some extent, these are not the primary purposes of the aging report in the audit context.

Question 15

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.

Accepted Answer

The confirmation of customers' balances involves reaching out to customers directly to verify the amount that they owe to the company. This is the most direct and reliable way to determine the existence of recorded accounts receivable. The other options (tracing credits to bank deposits, tracing sales returns entries, tracing sales entries to shipping documents) can help to identify possible discrepancies or errors, but do not provide as strong of an indication that the accounts receivable actually exist.

Question 16

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

Accepted Answer

Designing and performing analytical procedures for accounts receivable balance is part of the execution phase of an audit, which is Phase III. This phase involves performing audit procedures to gather evidence on the accuracy of the financial statements.

Question 17

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

Accepted Answer

Confirming with banks can reveal if the client has pledged their accounts receivable as collateral for a loan, while inquiries of the financial controller and reviewing minutes of director's meetings can provide information on any restrictions or limitations on the client's rights to accounts receivable. Therefore, all of these methods should be used to detect if the client's rights to accounts receivable are limited.

Question 18

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.

Accepted Answer

If the client's internal control for recording sales returns and allowances is evaluated as effective, the auditor will examine a sample of sales returns and allowances subsequent to the closing date to verify that the internal control is indeed effective. This is because an effective internal control system should ensure that all sales returns and allowances are properly recorded, and reviewing a sample of post-closing transactions helps to confirm this. Option A is incorrect because it is not always necessary to confirm sales returns with customers, especially if the internal control system is effective. Option C may be relevant, but it is not necessary for an effective internal control system to trace all sales returns to supporting documentation. Option D is also not necessary if the internal control system has been evaluated as effective.

Question 19

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.

Accepted Answer

Internal controls for accounts receivable are not directly related to the existence or valuation of accounts receivable balances, therefore it is not a specific audit objective for accounts receivable. The other three options are all valid audit objectives for accounts receivable balances.

Question 20

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

Accepted Answer

This audit procedure tests the completeness objective by ensuring that all accounts receivable are included in the aged trial balance.

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

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

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.

to positive confirmations do NOT provide audit evidence.

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

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

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

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

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

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

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

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?

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

Tests of details of balances focus on:

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:

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

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

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

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

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

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.