Question 1

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?
A) Examine cash receipts received after year-end.
B) Confirm receivables.
C) Examine dates of purchase orders.
D) Foot the receivables lead schedule.

Accepted Answer

A

Question 2

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?
A) Accounts receivable are overstated at December 31, 20X0.
B) Accounts receivable are understated at December 31, 20X0.
C) Operating expenses are overstated for the 12 months ended December 31, 20X0.
D) Sales returns and allowance are overstated at December 31, 20X0.

Accepted Answer

The CPA is likely to discover that accounts receivable are overstated at December 31, 20X0, because the sales were recorded in December 20X0 instead of January 20X1, leading to an overstatement of receivables for the year-end.

Question 3

Accounts receivable that are written off should not be turned over to a collection agency.

Accepted Answer

Accounts receivable that are written off are typically turned over to a collection agency in an attempt to recover the amount owed.

Question 4

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?
A) The confirmation requests are sent on the client's letterhead.
B) The confirmation requests are mailed to customers by the internal auditors.
C) The client's mailroom personnel closely monitor and inspect confirmation requests during mailing.
D) The return address on the envelope used to send the confirmation request is that of the client.

Accepted Answer

Using the client's letterhead for confirmation requests is a standard practice that does not inherently diminish the validity of the evidence obtained. It is expected that official communications, such as confirmation requests, would be on the company's letterhead to ensure recipients recognize the sender and understand the nature of the request.

Question 5

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?
A) Examine sales invoices.
B) Inclusion of the information in the engagement letter.
C) Examine correspondence.
D) Examine any subsequent cash receipts.

Accepted Answer

Inclusion of the information in the engagement letter is not typically considered an alternate procedure for handling nonreplies to accounts receivable confirmation requests, as it is not a direct way to obtain confirmation from the customer. The other options (examining sales invoices, correspondence, and subsequent cash receipts) are all potential alternate procedures to obtain the necessary audit evidence.

Question 6

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?
A) Examine bills of lading.
B) Physically examine items sold.
C) Examine correspondence.
D) Examine subsequent cash receipts.

Accepted Answer

Physically examining items sold is not a typical alternate procedure for handling nonreplies to accounts receivable confirmation requests. The other options are more commonly used as alternate procedures, such as examining bills of lading, correspondence, and subsequent cash receipts.

Question 7

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

Accepted Answer

Confirming accounts receivable directly with the debtor helps in verifying their existence as it involves getting a response from the debtor themselves, which adds credibility to the accounts receivable balance.

Question 8

To test the existence assertion for recorded receivables, an auditor would select a sample from the:
A) Sales orders file.
B) Customer purchase orders.
C) Accounts receivable subsidiary ledger.
D) Shipping documents (bills of lading) file.

Accepted Answer

The accounts receivable subsidiary ledger is the most relevant choice for testing the existence assertion for recorded receivables as it contains detailed information about individual customer balances and transactions. The other options may provide some useful information, but they are not as closely linked to the specific receivables being tested.

Question 9

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?
A) Sales.
B) Cash.
C) Inventory.
D) Accounts receivable.

Accepted Answer

Since the physical count was performed one month prior to year-end, any changes to the inventory during that month are not reflected in the inventory balance at year-end. Therefore, the inventory balance reported on the financial statements is likely to be overstated. The timing of the credit sales is not relevant to the inventory balance, and neither is cash or accounts receivable.

Question 10

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?
A) Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables.
B) Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash.
C) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
D) The failure to prepare shipping documents may lead to an understatement of inventory balances.

Accepted Answer

The answer of Which of the following fraudulent activities most...

Question 11

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.

Accepted Answer

Confirming accounts receivable with the customers provides external evidence that the recorded balances are accurate and that there is no manipulation or fraud taking place, such as lapping (the practice of using payments from one customer to conceal the theft of cash received from another customer). Therefore, confirmation of accounts receivable can provide some assurance that such manipulations are not occurring.

Question 12

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.

Accepted Answer

Negative confirmations are used less frequently because they provide less assurance, as they only require a response if the recipient disagrees with the stated amount. Positive confirmations require a response in all cases, providing more reliable evidence.

Question 13

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.

Accepted Answer

An aged trial balance breaks down the accounts receivable by the length of time they have been outstanding, which provides information on which accounts are potentially uncollectible. This information can then be used to determine if the allowance for uncollectible accounts is adequate or needs to be adjusted.

Question 14

The department approving a sales transaction should be the shipping department.

Accepted Answer

The department approving a sales transaction should be the sales department, not the shipping department. The shipping department would fulfill the order once the transaction has been approved.

Question 15

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

Accepted Answer

Confirmation requests should contain a "business reply" envelope addressed to the auditors, but at the auditor's address, not the client's, to ensure independence and confidentiality of the response.

Question 16

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?
A) Cash receipts.
B) Payroll.
C) Purchases.
D) Sales.

Accepted Answer

Entries recorded in the sales journal are most likely to overstate accounts receivable balances by including January transactions as December sales.

Question 17

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

Accepted Answer

This statement is true. Analytical procedures involve comparing financial statement information with expectations based on past results, industry standards, and other information to identify significant fluctuations or anomalies. By applying analytical procedures to an entity's accounts that are prone to uncollectible accounts, auditors can gain evidence about the adequacy of the allowance for uncollectible accounts.

Question 18

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.

Accepted Answer

Auditors can use alternative procedures to satisfy themselves as to the existence of accounts receivable when they are unable to confirm them. These alternative procedures may include examining supporting documents such as invoices, shipping documents, and customer contracts, as well as performing tests of transactions and balances to assess the validity and completeness of the accounts receivable balance.

Question 19

Material accounts receivable from related parties should be stated separately from other receivables.

Accepted Answer

Material accounts receivable from related parties should be disclosed separately in the financial statements to ensure transparency in the reporting of transactions with related parties.

Question 20

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?
A) The account balances as of year-end will generally be confirmed.
B) The auditors will in general use blank rather than positive confirmation requests.
C) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end.
D) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

Accepted Answer

When control risk for the existence assertion is assessed at a high level, auditors are likely to confirm account balances as of year-end to obtain direct evidence regarding the existence and accuracy of receivables. This approach helps in directly verifying the amounts owed by customers at the balance sheet date.

Quiz 11: Accounts Receivable, Notes Receivable, and Revenue

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable that are written off should not be turned over to a collection agency.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

To test the existence assertion for recorded receivables, an auditor would select a sample from the:

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?