Question 1

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

Accepted Answer

A credit note is a document issued by a seller to indicate a reduction in the amount due from a customer. It is usually issued in response to a returned product, or a dispute over the pricing of a product or service. The credit note serves as a record of the seller's obligation to refund part of the amount paid by the customer, and the customer's obligation to pay the remaining balance.

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.

Accepted Answer

The sales and collection cycle involves the sale of goods or services to customers, the recognition of revenue, and the collection of payment through accounts receivable. The transfer of ownership of goods and the conversion of services into accounts receivable are both key components of this cycle.

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.

Accepted Answer

The overall objective of 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. This encompasses more than just ensuring the absence of errors, as it is also concerned with the fairness of presentation. The other choices presented are too narrow or do not capture the full scope of the objective.

Question 4

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

Accepted Answer

A credit note is actually a document used to indicate a reduction or adjustment to an invoice or a customer's account, not to write off an account receivable as uncollectible. Writing off accounts receivable as uncollectible is typically done through a separate process, such as creating a bad debt expense.

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.

Accepted Answer

The audit of the sales and collection cycle can be performed independently of the audit of other cycles. However, it is important to coordinate with audits of other cycles to ensure that information is consistent across all areas. Additionally, the audit of cash may be important in verifying the accuracy of customer payments and accounts receivable balances.

Question 6

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

Accepted Answer

Transactions can affect various accounts on the balance sheet beyond just two, including assets, liabilities, and equity accounts, depending on the nature of the transaction.

Question 7

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

Accepted Answer

Cash receipts are vulnerable to theft as they involve physical currency. It is crucial to establish proper internal controls, segregation of duties, and regular reconciliations to minimize the risk of theft. Failure to do so can result in financial loss, damage to reputation, and legal consequences. Therefore, theft prevention should be the top concern in processing and recording cash receipts.

Question 8

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

Accepted Answer

Most companies recognize sales when goods are delivered or services are rendered, not merely when they are ordered, to comply with the revenue recognition principle.

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.

Accepted Answer

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 the relevant accounting standards. This includes examining the effectiveness of internal controls, testing transactions, and evaluating the accuracy and completeness of financial statement disclosures. By doing so, the auditor can provide reasonable assurance that the financial statements are free from material misstatement and fairly represent the financial position and performance of the entity.

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

Accepted Answer

Depreciation allowance is not a transaction in the sales and collection cycle, as it is a non-cash expense related to fixed assets. The other options, cash receipts, sales on account, and cash sales, are all types of transactions that would be included in the cycle.

Question 11

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

Accepted Answer

A bill of lading (B/L) is a legal document that serves as a receipt of goods shipped, as well as evidence of the contract of carriage between the shipper and the carrier. It contains information such as the names and addresses of the parties involved, the description of the goods, the point of origin and destination, and the terms and conditions of the shipment.

Question 12

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

Accepted Answer

A bill of lading is a document issued by a carrier to acknowledge receipt of cargo for shipment, not related to the billing of customers. The other documents mentioned are related to customer billing and accounts receivable processes.

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.

Accepted Answer

The answer of The classes of transactions in the sales...

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

Accepted Answer

The five classes of transactions in the sales and collection cycle are:
1) Sales
2) Cash Receipts
3) Sales returns and allowances
4) Write-off of uncollectible accounts
5) Estimate of doubtful accounts
Payroll for sales staff does not fall under any of these categories.

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

Accepted Answer

The answer of Accounting information flows through the various accounts...

Question 16

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

Accepted Answer

The answer of State the five classes of transactions that...

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

Accepted Answer

The sales and collection cycle includes the following five classes of transactions: 
1) Sales 
2) Cash receipts 
3) Sales returns and allowances 
4) Write-off of uncollectible accounts (bad debt expense) 
5) Recovery of bad debts. 
Depreciation expense-store equipment is not a class of transaction included in the sales and collection cycle. It belongs to the property, plant, and equipment cycle.

Question 18

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

Accepted Answer

A bill of lading is a legal document issued by a carrier to a shipper, detailing the type, quantity, and destination of the goods being carried. It serves as a shipment receipt when the carrier delivers the goods at the predetermined destination. Unlike a sales invoice, which is used to request payment, a bill of lading is primarily a shipping document.

Question 19

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

Accepted Answer

The prelisting of cash receipts should be prepared by a different individual, such as a receptionist or cashier, who has no access to cash or accounting records to ensure proper documentation and segregation of duties.

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

Accepted Answer

The sales and collection cycle typically includes transactions related to sales, sales returns and allowances, allowances for doubtful debts, and bad debt expense. Cash credits from the cash payments journal are not typically included in this cycle, as they relate more to the cash disbursements or payment cycle.

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