Question 1

The net realizable value of accounts receivable is equal to:
A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.

Accepted Answer

Net realizable value of accounts receivable is the amount that the company actually expects to receive. It is calculated by subtracting the estimated amount of uncollectible accounts (allowance for doubtful accounts) from the gross accounts receivable. Therefore, option A is correct. Option B is incorrect because bad debt expense is an expense account and has nothing to do with the estimation of net realizable value. Options C and D are incorrect because returns, allowances, and sales discounts are not related to the estimation of the net realizable value of accounts receivable.

Question 2

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Accepted Answer

Tests of presentation and disclosure-related objectives are typically done during the completion phase of the audit to ensure that the information provided in the financial statements is complete, accurate, and in compliance with generally accepted accounting principles.

Question 3

For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff since cash only affects the balance sheet, and not earnings.

Accepted Answer

The answer of For most audits, a proper cash receipts...

Question 4

The auditor must have a thorough understanding of the accounting standards, including presentation and disclosure requirements, for accounts receivable when performing the audit of accounts receivable.

Accepted Answer

The auditor must have a thorough understanding of the accounting standards for accounts receivable to properly assess the accuracy and completeness of the financial statements. This includes knowledge of the presentation and disclosure requirements for accounts receivable.

Question 5

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of
A) accuracy.
B) existence.
C) control.
D) completeness.

Accepted Answer

The test of selecting a sample from the file of shipping documents to determine whether invoices were prepared is aimed at determining whether all the invoices have been prepared and sent to the customers in a timely fashion. This test aims to achieve the audit objective of completeness, which ensures that all the transactions that should have been recorded have indeed been recorded in the financial statements.

Question 6

Audit data analytics can be used to test accuracy of invoices outstanding at the end of the year by matching these invoices to subsequent cash receipts after year-end.

Accepted Answer

Audit data analytics can be used to match invoices outstanding at the end of the year to subsequent cash receipts to test their accuracy. This can help in identifying any discrepancies and errors in the financial records.

Question 7

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.

Accepted Answer

Tests of detail tie-in are typically conducted early in the audit process to verify that the details of the sales and collections cycle transactions accurately tie into the general ledger accounts, ensuring the transactions are recorded correctly.

Question 8

Many manufacturing and merchandising audit clients record sales based on shipment of goods criterion and make the necessary adjustments at period end to record revenues in the proper period.

Accepted Answer

This statement is true. Many companies use the shipment of goods criterion to record sales, but adjustments may be necessary at period end to ensure revenue is recorded in the proper period.

Question 9

Significant credit balances in accounts receivable should be reclassified as accounts payable.

Accepted Answer

The answer of Significant credit balances in accounts receivable should...

Question 10

The auditor can use audit data analytics to identify potential situations where sales returns are understated or the allowance for doubtful accounts is understated for specific customers.

Accepted Answer

Audit data analytics can be used to detect anomalies or patterns in data that may indicate potential misstatements or fraud, including situations where sales returns or allowances for doubtful accounts are understated. By analyzing transactional data and comparing it to industry benchmarks or historical trends, auditors can identify unusual patterns or outliers that may require further investigation or testing.

Question 11

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Accepted Answer

Tests of the realizable value balance-related audit objective typically focus on evaluating the allowance for doubtful accounts, which is a reserve account that reflects the estimated amount of accounts receivable that may not be collectible. By testing the allowance for doubtful accounts, auditors can assess whether the recorded amounts of accounts receivable are fairly stated in the financial statements.

Question 12

It is acceptable under generally accepted accounting principles for the client to include material related party receivables together with trade receivables on the balance sheet.

Accepted Answer

Generally accepted accounting principles require material related party receivables to be disclosed separately from trade receivables in the balance sheet to provide transparency for users of the financial statements. Combining the two could potentially obscure the true financial position of the company.

Question 13

When designing tests of details of balances, an important point to remember is
A) auditors emphasize income statement accounts.
B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high.
C) if accounts receivable are overstated, then sales will be understated.
D) sales cutoff is the most important test of details of accounts receivable.

Accepted Answer

The audit procedures selected for tests of details of balances depend heavily on whether planned evidence is low, medium, or high for a given objective. This is an important point for auditors to remember when designing tests of details of balances. Options A, C, and D are not accurate statements in the context.

Question 14

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Accepted Answer

Confirmation is a widely used method to verify the balances of accounts receivable as it involves directly contacting the customers and requesting them to confirm the outstanding amounts. Other tests of details for accounts receivable include examining supporting documentation, reviewing aging schedules, and analyzing the collectability of accounts.

Question 15

As a test of the occurrence transaction-related audit objective for sales and the accuracy balance-related audit objective for accounts receivable, auditors can use audit data analytics to match, for example, cash receipts to invoiced sales amounts.

Accepted Answer

This statement is true. Auditors can use audit data analytics to match cash receipts to invoiced sales amounts to test the occurrence transaction-related audit objective for sales and the accuracy balance-related audit objective for accounts receivable.

Question 16

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Accepted Answer

The answer of The criterion used by most merchandising and...

Question 17

After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify bad debt expense.

Accepted Answer

Once the auditor is satisfied with the allowance for uncollectible accounts, verifying bad debt expense becomes easier because it directly relates to changes in the allowance and the year's write-offs, providing a clear basis for verification.

Question 18

When an auditor tests to determine if all existing accounts receivable are included in the aged trial balance,
A) they cannot rely on the self-balancing nature of the accounts receivable master file.
B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the understatement of accounts receivable by tests of details of balances.
C) auditors rarely send accounts receivable confirmations to customers with zero balances.
D) unrecorded sales to a new customer are easy to identify for confirmation because that customer is included in the accounts receivable master file.

Accepted Answer

Auditors typically focus their efforts on confirming accounts with balances, as these provide evidence of amounts owed to the company. Confirming accounts with zero balances is less common because they do not directly impact the financial statements' accuracy regarding amounts receivable.

Question 19

If sales are made FOB (free on board) shipping point or FOB destination at a period end, revenue does not need to be adjusted in either situation.

Accepted Answer

If sales are made FOB shipping point, revenue is recognized when the goods are shipped out and ownership is transferred to the buyer. However, if sales are made FOB destination, revenue is recognized only when the goods are received by the buyer at the destination. In both cases, if the period end has been reached but the goods have not yet been shipped or received, revenue should be recognized based on the progress towards completion of the sale. Therefore, adjustments may be needed.

Question 20

For retailers, the auditor should examine supporting documentation for a sample of sales returns and allowances recorded for several weeks after year end to determine if the allowance for returns and allowances is adequate.

Accepted Answer

The statement is true. The auditor should examine supporting documentation for a sample of sales returns and allowances recorded for several weeks after year end to determine if the allowance for returns and allowances is adequate. This is important to ensure that the financial statements reflect the true amount of net sales, and to prevent overstatement of revenue.

Quiz 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

The net realizable value of accounts receivable is equal to: