Question 1

When the PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard, the PCAOB did not mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard.

Accepted Answer

The PCAOB did mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard in its May 2017 guidance.

Question 2

The extent of tests of controls in audits of nonpublic companies depends on the effectiveness of the controls and the extent to which the auditor believes they can be relied on to reduce control risk.

Accepted Answer

The statement is true. The extent of tests of controls depends on the effectiveness of the controls and the extent to which the auditor believes they can reduce control risk. If the controls are deemed effective and reliable, the auditor may reduce testing. If the controls are deemed weak or unreliable, the auditor may need to perform additional testing.

Question 3

If a design test of controls for sales is, for example, testing internal controls are working to electronically indicate approval for customer orders after they have been approved for credit, the test of control is to examine the customer order for proper approval.

Accepted Answer

This is true as the test of control involves examining the customer order for proper approval to ensure that the internal controls are functioning effectively.

Question 4

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Accepted Answer

Misstatements involving the completeness objective for sales typically lead to understatements of assets and income, as they involve omitting or not recording sales transactions that should have been recorded.

Question 5

The appropriate tests of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.

Accepted Answer

Tests of controls for separation of duties usually involve observing activities and discussing them with personnel.

Question 6

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

Accepted Answer

The answer of Which of the following is the appropriate...

Question 7

Certain internal controls related to financial statement presentation and footnote disclosures operate infrequently, such as quarterly or annually when the financial statements are prepared.

Accepted Answer

Certain internal controls related to financial statement presentation and footnote disclosures are indeed only implemented infrequently, typically when the financial statements are being prepared on a quarterly or annual basis.

Question 8

The accurate recording of sales transactions concerns all of the following except for

Accepted Answer

Proper credit authorization is related to credit management and risk assessment, not directly to the accurate recording of sales transactions.

Question 9

Separation of duties in the sales and collection cycle should mandate that the credit-granting function be separate from the sales function.

Accepted Answer

Separation of duties is a crucial internal control for preventing fraud and errors in financial processes. Separating the credit-granting function from the sales function ensures that sales personnel do not have the authority to approve credit applications or set credit limits, which could create conflicts of interest and increase the risk of granting credit to risky customers. Instead, credit-granting should be performed by a separate department or individual with the expertise and authority to assess creditworthiness and make credit decisions based on objective criteria.

Question 10

Computer programs or independent personnel should check that the processing and recording of sales transactions fulfill each transaction-related audit objective. Examples include reviewing financial statements and footnote disclosures for proper aggregation, relevance, and understandability.

Accepted Answer

It is important to ensure that sales transactions are processed and recorded correctly in order to meet transaction-related audit objectives. This may involve checking financial statements and disclosures for accuracy, relevance, and clarity.

Question 11

Tracing from source documents to the journal is useful for testing the existence objective.

Accepted Answer

Tracing from source documents to the journal is useful for testing completeness, not existence. Existence is tested by vouching from the journals to the source documents.

Question 12

For each key control, one or more tests of controls must be designed to verify its effectiveness.

Accepted Answer

This statement is true. Tests of controls must be designed to verify the effectiveness of each key control.

Question 13

An effective procedure to test the occurrence/existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices.

Accepted Answer

Vouching sales journal entries to copies of sales orders, shipping documents, and sales invoices is an effective procedure to test the occurrence/existence objective for sales. This allows auditors to verify that sales transactions actually occurred and that the recorded sales are accurate.

Question 14

Common tests of internal controls related to financial statement presentation and footnote disclosures include observing or examining an indication of management's review and approval of information presented and disclosed in the financial statements.

Accepted Answer

This is true, as observing or examining evidence of management's review and approval of financial statement presentation and footnote disclosures is a common test of internal controls.

Question 15

As a test of control, the auditor examines sales invoices for supporting documents. The relevant transaction-related audit objective is

Accepted Answer

The answer of As a test of control, the auditor...

Question 16

Violations of the occurrence/existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

Accepted Answer

Violations of the occurrence/existence objective for sales mean that sales have been recorded for transactions that did not actually occur, which could lead to the overstatement of sales and income. This is a material misstatement and is a greater concern to the auditor than violations of the completeness objective, which would only result in the understatement of sales and income.

Question 17

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

Accepted Answer

Selling of goods for cash does not require specific authorization as the customer is paying at the time of purchase. However, the granting of credit or determining discounts may require specific authorization to ensure that proper procedures are followed and there is no fraud or error in the transaction. Shipment of goods also requires proper authorization to ensure accuracy in inventory and shipping records.

Question 18

The PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard.

Accepted Answer

The PCAOB did issue guidance in May 2017 to help auditors of public companies implement the new revenue recognition standard.

Question 19

For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

Accepted Answer

This statement is true. When the auditor identifies a significant internal control deficiency, they should design tests of controls to assess the extent of the deficiency and its impact on the financial statements. This helps the auditor determine the level of risk associated with the deficiency and the potential impact on the financial statements.

Question 20

Which of the following test of controls is useful to test the completeness objective for cash receipts?

Accepted Answer

The answer of Which of the following test of controls...

Quiz 14: Audit of the Sales and Collection Cycle: Tests of Controls