Question 1

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

Accepted Answer

By comparing the daily sales summaries to the daily postings in the accounts receivable ledger, any discrepancies can be identified and corrected promptly, ensuring that all billed sales are correctly posted to the accounts receivable ledger. The other options listed may help with other aspects of internal control but do not directly address the posting of billed sales to the accounts receivable ledger.

Question 2

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

Accepted Answer

Customers may not have an incentive to report if their account balance is understated, as this would be in their financial favor, making confirmations less reliable for testing completeness.

Question 3

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

Accepted Answer

Matching prenumbered shipping documents with entries in the sales journal ensures that all shipments (and thus, credit sales transactions) are recorded, helping to prevent both omission of sales and recording of sales that did not occur.

Question 4

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

Accepted Answer

The overall approach used when performing cutoff tests is to analyze transactions occurring within a few days before and after year-end to determine if they have been recorded in the proper accounting period. This helps ensure that revenue and expenses are properly recognized in the correct period. The other options listed are not generally used as part of the cutoff testing process.

Question 5

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

Accepted Answer

Negative confirmation of accounts receivable is less effective than positive confirmation because the auditor cannot infer that all nonrespondents have verified their account information. This means that even if a recipient does not respond to a negative confirmation, the auditor cannot be sure that the information is correct. On the other hand, with positive confirmation, the recipient is specifically asked to confirm the balance, increasing the likelihood of accurate information being obtained.

Question 6

A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation:

Accepted Answer

The customer's reply provides evidence of existence because it confirms that the customer is aware of the $250 charge and acknowledges its presence on the account. The fact that the customer disputes the charge does not negate its existence.

Question 7

The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the:

Accepted Answer

The client's internal control over transactions affecting receivables is the primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date. This is because the strength of the client's internal control will affect the reliability of confirmation responses received from customers. If the client's internal control is strong, confirmation responses are more likely to be reliable and therefore may not need to be sent before the balance sheet date. If the client's internal control is weak, confirmation responses may be less reliable and therefore may need to be sent before the balance sheet date to obtain sufficient appropriate evidence. Factors such as the type of confirmation to be used, availability of staff auditors, and number of customer accounts are important considerations but are not as significant as the client's internal control.

Question 8

Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include:

Accepted Answer

The auditor's year-end procedures for testing internal control procedures must include testing the client's internal control procedures from October 15 through the year end, as the controls could have changed or become ineffective during that time period. The other options are not necessary or relevant for testing the effectiveness of internal control procedures at year-end.

Question 9

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Accepted Answer

Tracing shipping documents to prenumbered sales invoices ensures that shipments to customers have been properly invoiced, confirming that the goods shipped have corresponding sales invoices.

Question 10

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

Accepted Answer

The aging of receivables is used to assess the valuation or allocation assertion, as it provides information on the likelihood of collection and potential write-offs. The existence assertion relates to whether the receivables actually exist, completeness relates to whether all receivables have been recorded, and rights and obligations relate to whether the entity has legal ownership of the receivables.

Question 11

In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?

Accepted Answer

Checking the numerical sequence of shipping documents relates to the completeness assertion, as it ensures that no shipments are missing from the sequence and all have been accounted for in the company's records.

Question 12

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

Accepted Answer

Confirming accounts receivable primarily helps in identifying discrepancies in the amounts owed by customers as recorded by the company. Lapping, which involves manipulating accounts to cover embezzlement, could be detected through confirmation discrepancies, as customers might report different balances than those recorded. Other options are less likely to be discovered through this method since they involve unrecorded transactions or manipulations not directly related to customer account balances.

Question 13

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

Accepted Answer

The answer of In which of the following circumstances would...

Question 14

Which of the following statements is correct concerning the use of negative confirmation requests?

Accepted Answer

Negative confirmation requests, where the recipient is asked to respond only if they disagree with the information provided, rarely provide significant explicit evidence when unreturned. This is because the lack of response might not necessarily indicate agreement with the information, but could be due to other reasons such as oversight or indifference.

Question 15

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Accepted Answer

Inspecting the shipping records documenting the merchandise sold to the debtors is a common alternative procedure when auditors do not receive replies to accounts receivable confirmations. This helps verify the existence and accuracy of recorded receivables by providing evidence that the sales transactions actually occurred.

Question 16

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

Accepted Answer

The sales cutoff is the point in time when sales should be recognized in the financial statements. The auditor would review the client's sales cutoff to ensure that all sales made during the year-end have been appropriately recorded in the financial statements. Unrecorded sales at year-end would be a concern as they would result in an understatement of sales and an overstatement of accounts receivable.

Question 17

In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from:

Accepted Answer

Negative confirmations, where the recipient is asked to respond only if they disagree with the information provided, are considered less reliable evidence compared to other options. This is because the lack of response does not necessarily confirm the accuracy of the account balance, as it could be due to the recipient overlooking the request or choosing not to respond for other reasons.

Question 18

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions?

Accepted Answer

The auditor is testing whether the recorded sales actually occurred, which relates to the occurrence assertion. Vouching involves tracing transactions from the recorded amount to the original source documents, such as shipping documents. This test verifies that the sale actually took place and was properly recorded. Completeness tests ensure that no sales were missed, accuracy tests ensure consistent accounting, and cutoff tests ensure that sales are recorded in the appropriate period.

Question 19

The most effective audit procedure for determining the collectability of an account receivable is the:

Accepted Answer

Reviewing subsequent cash collections directly addresses the collectability of an account receivable by providing evidence that the receivable has been or can be converted into cash, which is the ultimate test of its collectability.

Question 20

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when:

Accepted Answer

If a positive confirmation request is sent to the customer and no reply is received, it could indicate that the customer did not receive the request, did not respond or the receivables do not exist. Therefore, the auditor should perform alternative procedures to validate the existence of accounts receivable. In contrast, if no reply is received to a negative confirmation request, it is considered a reliable form of audit evidence, and no further procedures are required. Collectability and pledging of receivables are separate issues that may require additional procedures.

Quiz 7: Revenue and Collection Cycle 279