Question 1

Which one of the following statements is true? In deciding on substantive tests of transactions:
A) some procedures are commonly employed on every audit regardless of the circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
C) results obtained in the prior year's audit will not affect the procedures used this year.
D) the materiality of the item will not influence the choice of procedures used.

Accepted Answer

Some procedures are commonly employed in every audit regardless of the circumstances, such as confirmation of bank balances and accounts receivable. These are standard practices in auditing to ensure the reliability of financial statements.

Question 2

In a lockbox system,bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Accepted Answer

In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Question 3

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

Accepted Answer

A credit memo is issued by a seller to a buyer, reducing the amount the buyer owes to the seller under the terms of an existing invoice, often due to returned goods or an overcharge, not for writing off an account as uncollectible.

Question 4

When designing audit procedures,tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
A) Valuation
B) Cutoff
C) Completeness
D) Classification

Accepted Answer

Tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy the completeness assertion, which ensures that all transactions that should have been recorded have been recorded. This procedure ensures that no transaction has been omitted from the accounting system.

Question 5

The shipping point is critical because it is the first point at which company assets are released to another party.

Accepted Answer

The shipping point is where the company releases its products to be shipped to the customer or distributor. This means that it is the first point at which company assets, in the form of inventory or finished goods, are transferred to another party. Therefore, it is critical for a company to have proper procedures in place at the shipping point to ensure that its assets are protected and transferred correctly.

Question 6

When assessing risk control,the auditor must do all of the following except:
A) assess control risk for each objective by evaluating the controls and deficiencies for each objective.
B) perform the detailed test of balances.
C) identify the key internal controls and deficiencies.
D) associate the key controls and deficiencies with the objectives.

Accepted Answer

The auditor must assess control risk for each objective by evaluating the controls and deficiencies for each objective, identify the key internal controls and deficiencies, and associate the key controls and deficiencies with the objectives. However, the auditor does not need to perform the detailed test of balances as part of assessing risk control. This is part of the substantive testing phase.

Question 7

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. It is not a sales invoice but rather a document that accompanies goods in transit, providing evidence of the contract of carriage.

Question 8

In many audits,no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.
A) accuracy
B) existence
C) completeness
D) none of the above

Accepted Answer

In many audits, the completeness assertion is not substantively tested for transactions related to sales because the primary concern is usually overstatement rather than understatement of sales. The completeness assertion addresses whether all transactions that should have been recorded have been recorded, and in the context of sales, auditors often focus more on whether sales have been overstated rather than understated.

Question 9

A bill of lading is a written contract between the seller and the buyer.

Accepted Answer

A bill of lading is a legal document between the carrier and the shipper, not the seller and the buyer. It serves as a receipt of goods shipped or to be shipped, as well as a document of title and evidence of the contract of carriage.

Question 10

Sales transactions are the result of the following five functions in the sales and collection cycle:
 processing customer orders,granting credit,shipping goods,billing customers,and recording sales.

Accepted Answer

These five functions represent the major steps in the sales and collection cycle.

Question 11

To test for recorded sales for which there were no actual shipments,the auditor vouches from the:
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Accepted Answer

Vouching from the sales journal to the shipping documents would allow the auditor to verify if the sales recorded in the sales journal were actually shipped out to customers. This would help to detect any fictitious or inflated sales that were recorded but not actually fulfilled through shipping. Vouching from the bill of lading to the sales journal (choice A) or from the bill of lading to the supporting customer order and sales order (choice D) would not be as effective in detecting non-existent sales, as these documents only show evidence of shipments that have already occurred. Vouching from the sales journal to the accounts receivable subsidiary ledger (choice C) would help to ensure that the recorded sales are properly reflected in the accounts receivable balances, but would not detect any sales that were not actually shipped.

Question 12

If a company uses a periodic inventory system,the shipping records are used to update the inventory quantities.

Accepted Answer

In a periodic inventory system, the inventory quantities are updated only at the end of the accounting period (usually monthly, quarterly or annually) by taking a physical inventory count. Shipping records are not used to update inventory quantities in a periodic inventory system. In contrast, a perpetual inventory system updates inventory quantities continuously through the use of computerized records, including shipping records.

Question 13

When assessing planned control risk for sales:
A) the key internal controls and deficiencies for sales will be the same for every company.
B) the audit objectives for sales will differ from company to company.
C) a flowchart is required to help assess control risk for sales.
D) assessing control risk for sales is a highly subjective decision.

Accepted Answer

Assessing control risk for sales is a highly subjective decision as it depends on the specific circumstances, internal controls, and deficiencies of each individual company. There is no one-size-fits-all approach to assessing control risk for sales, and it requires professional judgment and expertise. A flowchart may be helpful in understanding the sales process, but it is not a requirement for assessing control risk. The audit objectives for sales may be similar across companies, but they will also depend on the specific risks and controls for each company.

Question 14

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:
A) sales order.
B) bill of lading.
C) sales journal.
D) sales invoice.

Accepted Answer

The sales invoice is the document that provides the details of the sale, including the items sold, quantity, price, payment terms, and customer information. It is the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger. The sales order is used to initiate the sales process, the bill of lading is used in shipping and receiving goods, and the sales journal is a bookkeeping record of all sales transactions.

Question 15

When sales invoices are automatically calculated and posted by a computer,the auditor may be able to reduce substantive tests of transactions for which,if any,assertion?
A) Accuracy
B) Existence
C) Completeness
D) None of the above

Accepted Answer

When sales invoices are automatically calculated and posted by a computer, the auditor may rely on the accuracy assertion, as the calculation is done automatically by the system. Therefore, the auditor may reduce substantive tests of transactions related to the accuracy assertion. However, the auditor should still perform substantive tests for other assertions, such as existence and completeness.

Question 16

The sales journal is generated from the sales transaction file.

Accepted Answer

The sales journal is a record of all sales made by a company during a specified period of time. It is generated from the sales transaction file, which contains details of each individual sales transaction. The sales journal is an important tool for tracking sales revenue, analyzing sales trends, and preparing financial statements.

Question 17

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

Accepted Answer

The prelisting of cash receipts should be prepared by someone independent of the recording process to ensure separation of duties and reduce the risk of theft or fraud.

Question 18

An effective procedure to test for unbilled shipments is to trace from the:
A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.

Accepted Answer

Tracing from shipping documents to the sales journal will ensure that all shipments have been recorded in the sales journal and therefore billed to customers. This method checks for unbilled shipments by verifying that they have been recorded in the sales journal. Tracing from the sales journal to the shipping documents would not be as effective, as it would not identify any shipments that were not recorded in the sales journal. The accounts receivable ledger and general ledger sales account are not directly involved in recording shipments and therefore would not be as useful in testing for unbilled shipments.

Question 19

In determining the level of audit efficiency,once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client,it is appropriate to decide whether:
A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls.
B) substantive tests can be increased sufficiently to justify costs of performing tests of controls.
C) tests of controls can be increased sufficiently to justify costs of performing substantive tests.
D) tests of controls can be reduced sufficiently to justify costs of performing substantive tests.

Accepted Answer

Once the auditor has identified the key internal controls and deficiencies, they need to decide the level of control risk appropriate for a private company client. If the auditor determines that the internal controls are strong and effective, they can reduce the amount of substantive tests performed, which can in turn justify the cost of performing tests of controls. This would lead to increased audit efficiency as it would save the auditor time and resources. Therefore, option A is the best choice.

Question 20

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?
A) Making sure that all shipments have been billed
B) Making sure that no shipment has been billed more than twice
C) Making sure that each shipment is billed at the correct amount
D) Making sure that each shipment is billed to the proper customer

Accepted Answer

Making sure that all shipments have been billed provides evidence for the completeness assertion because it ensures that all transactions that should be recorded have indeed been recorded.

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

Which one of the following statements is true? In deciding on substantive tests of transactions:

In a lockbox system,bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

When designing audit procedures,tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

The shipping point is critical because it is the first point at which company assets are released to another party.

When assessing risk control,the auditor must do all of the following except:

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

In many audits,no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

A bill of lading is a written contract between the seller and the buyer.

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders,granting credit,shipping goods,billing customers,and recording sales.

To test for recorded sales for which there were no actual shipments,the auditor vouches from the:

If a company uses a periodic inventory system,the shipping records are used to update the inventory quantities.

When assessing planned control risk for sales:

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:

When sales invoices are automatically calculated and posted by a computer,the auditor may be able to reduce substantive tests of transactions for which,if any,assertion?

The sales journal is generated from the sales transaction file.

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

An effective procedure to test for unbilled shipments is to trace from the:

In determining the level of audit efficiency,once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client,it is appropriate to decide whether:

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?