Question 1

A customer reply on a positive confirmation says "We dispute the $250 charge.We believe it is excessive." This confirmation
A) Provides evidence of existence.
B) Does not provide evidence of existence because the customer may refuse to pay the $250 charge.
C) Provides evidence that the account was understated.
D) Provides evidence that the account should be written off.

Accepted Answer

The customer's response provides evidence of existence because it acknowledges the $250 charge and disputes the amount, indicating that the transaction did occur. The fact that the customer disputes the charge does not negate the existence of the transaction.

Question 2

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?
A) One of the cashiers has been covering a personal embezzlement by lapping.
B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C) One of the IT control clerks has been removing all sales invoices applicable to his account from the data file.
D) The credit manager has misappropriated remittances from customers whose accounts have been written off.

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 3

The most effective audit procedure for determining the collectability of an account receivable is the
A) Review of the subsequent cash collections.
B) Examination of the related sales invoice(s).
C) Confirmation of the account.
D) Review of authorization of credit sales to the customer and the previous history of collections.

Accepted Answer

Reviewing subsequent cash collections provides direct evidence of the collectability of an account receivable, as it shows whether the customer has actually paid the amount owed.

Question 4

Alpha Brewery Corporation recorded sales through January 4,2005,dating them December 31,2004.This situation is an example of a violation of which of the following assertions?
A) Existence or occurrence.
B) Completeness.
C) Classification.
D) Accuracy.

Accepted Answer

The recording of sales after the end of the year and dating them as December 31, 2004, violates the completeness assertion as it implies that all sales have been recorded for the period when in fact, some sales were recorded after the period end.

Question 5

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable,the auditor's opinion should be unqualified and could be expected to
A) Disclose the fact that alternative procedures were used due to client-imposed scope limitation.
B) Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C) Avoid mentioning the alternative procedures.
D) Include an explanatory paragraph that discloses the performance of alternative procedures.

Accepted Answer

If the auditor obtains sufficient competent evidence through alternative procedures, there is no need to mention the use of alternative procedures in the audit report, and an unqualified opinion can be issued without additional disclosure.

Question 6

Confirmations of accounts receivable provide the most evidence for which of the following assertions?
A) Existence.
B) Valuation or allocation.
C) Rights and obligations.
D) Completeness.

Accepted Answer

Confirmations of accounts receivable help to confirm the existence of the accounts and whether they are owned by the company. It does not provide evidence for valuation, rights and obligations, or completeness.

Question 7

In determining the adequacy of the allowance for uncollectible accounts,the least valuable evidence would be obtained from
A) An aging schedule of past due accounts that the auditor has tested.
B) Correspondence with the client's collection agency.
C) Financial statements of individual customers.
D) No reply to negative confirmations.

Accepted Answer

Negative confirmations provide the least valuable evidence because they rely on the absence of a response to indicate agreement, which is less reliable than other forms of evidence.

Question 8

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of
A) Occurrence.
B) Completeness.
C) Classification.
D) Accuracy.

Accepted Answer

The answer of Vouching debits from a sample selection of...

Question 9

Accountants should be under orders to record sales and accounts receivable when
A) The customer's order is received.
B) All supporting documentation of shipping is in order.
C) The item has been paid for.
D) The terms are agreed upon.

Accepted Answer

Recording sales and accounts receivable should be done when all supporting documentation of shipping is in order. This indicates that the product has actually been shipped to the customer, and therefore, the revenue can be recognized, and accounts receivable can be recorded. The customer's order being received or the terms being agreed upon does not necessarily indicate that the product has been shipped or that revenue can be recognized. Payment is not required for recognizing revenue or recording accounts receivable.

Question 10

The file that contains sales transactions that were initiated in the system but are not yet completed is the
A) Credit check file.
B) Sales detail.
C) Inventory master.
D) Pending order master.

Accepted Answer

The file that contains sales transactions that were initiated in the system but are not yet completed is the Pending order master. This file is used to keep track of pending sales orders until they are fulfilled or canceled, and it helps ensure that no orders are lost or overlooked. The credit check file is used to store information about customers' credit histories, the sales detail file contains information about completed transactions, and the inventory master file contains information about available inventory levels.

Question 11

When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's
A) Credit manager.
B) Treasurer.
C) Accountant.
D) Internal auditor.

Accepted Answer

The answer of When an account receivable is considered uncollectible,the...

Question 12

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?
A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
B) Analyze transactions occurring within a few days before and after year-end.
C) Confirm year-end transactions with regular customers.
D) Examine cash receipts in the subsequent period.

Accepted Answer

Cutoff tests involve analyzing transactions occurring within a few days before and after year-end to ensure that they are recorded in the correct accounting period. The other options do not accurately describe the overall approach used when performing cutoff tests.

Question 13

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?
A) Recorded sales in the sales journal are supported by invoices.
B) Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.
C) Sales are recorded in the proper account.
D) Invoice quantities are compared to shipment and customer order quantities.

Accepted Answer

Option D is an example of a control activity that satisfies the accuracy control objective for sales invoices, as it ensures that the quantities on the invoices are accurately recorded by comparing them to the shipment and customer order quantities. Options A, B, and C are also important control activities, but they relate to other control objectives such as completeness and validity.

Question 14

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except
A) Preparing the confirmation letters.
B) Mailing the confirmation letters.
C) Receiving the confirmation letters.
D) None of the above.

Accepted Answer

The answer of The auditor maintains control of the mailing...

Question 15

A small business owner can best offset the lack of separation of duties by
A) Creating an internal audit department.
B) Installing the latest computer equipment and software.
C) Being actively involved in the accounting process.
D) Relying on the external auditor to detect errors.

Accepted Answer

Being actively involved in the accounting process is the best way for a small business owner to offset the lack of separation of duties. By being directly involved in the accounting process, the owner can monitor financial transactions and ensure that proper controls are in place. This helps to prevent errors and fraud, and can also help the owner to detect any irregularities that do occur. While installing the latest computer equipment and relying on external auditors can also help, these measures are no substitute for direct involvement and oversight by the owner. Creating an internal audit department may also be impractical for a small business owner due to the cost involved.

Question 16

Which of the following audit procedures is the most effective in testing sales for understatement?
A) Analyze the aged trial balance of recorded accounts receivable.
B) Confirm recorded accounts receivable.
C) Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D) Vouch a sample of recorded sales from the sales journal to shipping documents.

Accepted Answer

Tracing shipping documents to sales invoices helps ensure that all shipments are invoiced and recorded as sales, effectively testing for understatement of sales.

Question 17

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when
A) No reply to a positive confirmation request is received.
B) No reply to a negative confirmation request is received.
C) Collectability of the receivables is in doubt.
D) Pledging of the receivables is probable.

Accepted Answer

When no reply to a positive confirmation request is received, it casts doubt on the accuracy of the accounts receivable balance. Therefore, alternative procedures should be performed to corroborate the existence of the receivables. This can include examining shipping documents, sales invoices, and other correspondence related to the receivables.

Question 18

The assertion that auditors will probably emphasize in the revenue and collection cycle is
A) Occurrence.
B) Completeness.
C) Accuracy.
D) Classification.

Accepted Answer

Auditors emphasize occurrence in the revenue and collection cycle to ensure that recorded sales transactions actually occurred and are not fictitious.

Question 19

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?
A) The balance is immaterial.
B) Confirmations would be ineffective.
C) The client requests alternative procedures be performed instead.
D) Other procedures provide sufficient competent evidence.

Accepted Answer

The auditor's decision on whether to send accounts receivable confirmations should be based on the effectiveness and relevance of the confirmation process, the materiality of the balances, and the sufficiency of other audit evidence available, not merely on the client's request for alternative procedures.

Question 20

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?
A) Completeness.
B) Accuracy.
C) Occurrence.
D) Classification.

Accepted Answer

Scanning sales invoices for missing numbers in the sequence is intended to ensure that all invoices that should have been issued have actually been issued, thus satisfying the completeness assertion.

Quiz 7: Revenue and Collection Cycle

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

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?

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

Alpha Brewery Corporation recorded sales through January 4,2005,dating them December 31,2004.This situation is an example of a violation of which of the following assertions?

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable,the auditor's opinion should be unqualified and could be expected to

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

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

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

Accountants should be under orders to record sales and accounts receivable when

The file that contains sales transactions that were initiated in the system but are not yet completed is the

When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's

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?

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

A small business owner can best offset the lack of separation of duties by

Which of the following audit procedures is the most effective in testing sales for understatement?

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

The assertion that auditors will probably emphasize in the revenue and collection cycle is

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?