Question 1

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences?
A) Risk and emphasis on the completeness objective.
B) Materiality and emphasis on the accuracy objective.
C) Risk and emphasis on the classification objective.
D) Materiality and emphasis on the occurrence objective.

Accepted Answer

The answer of Transaction-related audit objectives are essentially the same...

Question 2

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:
A) deposits in transit.
B) collections on the company's behalf by the bank which are deposited directly to the company's account.
C) cash receipts that were not recorded in the relevant accounting records.
D) service charges.

Accepted Answer

The answer of Preparation of a proof of cash would...

Question 3

An effective procedure to test the 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 supporting documents like sales orders, shipping documents, and sales invoices helps to test the existence objective for sales. It provides evidence that the sales transactions actually took place and goods or services were delivered to customers.

Question 4

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

Accepted Answer

The answer of The transaction-related audit objectives and the client's...

Question 5

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Accepted Answer

Auditors are primarily concerned with determining if sales returns and allowances actually occurred as reported and are accurately recorded in the financial statements. This is the occurrence objective in auditing.

Question 6

Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?
A) Compare shipping documents with sales records.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace payments received subsequent to the balance sheet date.
D) Send accounts receivable confirmation requests.

Accepted Answer

Comparing shipping documents with sales records helps ensure that all shipments have been recorded as sales, thus testing the completeness of sales.

Question 7

To prevent fraud, management should deny cash access to anyone responsible for:
A) 
B) 
C) 
D)

Accepted Answer

The answer of To prevent fraud, management should deny cash...

Question 8

The occurrence objective (assertion) is of primary importance when performing transaction testing for sales. List and discuss the three potential misstatements that audit procedures are designed to detect.

Accepted Answer

The answer of The occurrence objective (assertion) is of primary...

Question 9

Sales returns and allowances are often ignored by auditors because they are often immaterial.

Accepted Answer

Sales returns and allowances can often be immaterial compared to the overall revenue of a company, which is why auditors may not focus much attention on them. However, if a company has a high volume of sales returns and allowances or if there are indications of potential fraud or irregularities, auditors may need to delve deeper into this area.

Question 10

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customers account that employee may be suspected of:
A) kiting.
B) lapping.
C) floating.
D) shorting.

Accepted Answer

A situation where an employee purposefully enters cash received into the wrong customer's account is known as lapping. This is a form of fraud where the employee covers up the embezzlement of funds by applying incoming payments from one customer to another customer's account.

Question 11

For effective internal control, it is important that sales be recorded as soon after the customer order is received as possible to prevent the unintentional omission of transactions from the records and to make sure that sales are recorded in the proper period.

Accepted Answer

Sales should be recorded when the goods or services are delivered, not when the order is received, to ensure accurate revenue recognition and compliance with accounting principles.

Question 12

Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties?
A) Persons having access to cash should also be responsible for recording sales, accounts receivable, and cash.
B) Separate the credit-granting function from the sales function.
C) Personnel doing internal comparisons should be independent of those entering the original data.
D) Anyone responsible for entering sales and cash receipts transactions information into the computer should be denied access to cash.

Accepted Answer

This choice suggests combining duties that should be separated. Persons having access to cash should not be responsible for recording sales, accounts receivable, and cash as it creates an opportunity for fraud or errors. Separation of duties is meant to create a system of checks and balances, and this choice goes against it.

Question 13

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?
A) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
B) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
C) Have customers send payments directly to the company's depository bank.
D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

Accepted Answer

Having customers send payments directly to the company's depository bank will prevent any employee from having access to the checks and reduce the risk of lapping.

Question 14

Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.

Accepted Answer

The answer of Footing the sales journal and tracing the...

Question 15

An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:
A) kiting.
B) lapping.
C) illicit write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.

Accepted Answer

The answer of An audit procedure that compares the name,...

Question 16

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 as per the generally accepted auditing standards (GAAS). The auditor should design and perform tests of controls to obtain reasonable assurance about the effectiveness of internal control over financial reporting. If significant deficiencies are identified, the auditor should assess the impact of these deficiencies on the financial statements and consider this in determining the nature, timing, and extent of further audit procedures.

Question 17

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?
A) Understating the sales journal by not recording cash sales.
B) Overstating the accounts receivable control account by intentionally misstating prices charged for goods sold.
C) Overstating the accounts receivable subsidiary ledger by not recording payments made by customers.
D) Understating the cash receipts journal by purposely recording incorrect amounts.

Accepted Answer

The answer of Cash receipts from sales on account have...

Question 18

The audit procedure referred to as proof of cash receipts is particularly useful to test:
A) time lags in making deposits.
B) whether all recorded cash receipts have been deposited in the bank.
C) whether there are cash receipts that have not been recorded in the journals.
D) the client's reconciliation between cash receipts and bank deposits.

Accepted Answer

The proof of cash receipts audit procedure is designed to test whether all recorded cash receipts have been deposited in the bank. By comparing the total of recorded cash receipts with the total of bank deposits, auditors can check for any discrepancies or inconsistencies that may indicate fraud or errors in the client's financial records. This procedure can help ensure the accuracy and reliability of the client's financial statements, especially with regard to cash balances and transactions. While time lags and unrecorded cash receipts may also be important audit considerations, they are not the primary focus of this particular test. The reconciliation between cash receipts and bank deposits is the main outcome of this procedure, but it is achieved by verifying the existence and completeness of recorded cash receipts in the bank account.

Question 19

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

Accepted Answer

When auditing sales returns and allowances, the emphasis is normally on testing the occurrence and accuracy objectives to ensure that recorded returns and allowances actually occurred and are accurately recorded, rather than primarily focusing on completeness.

Question 20

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points.

Accepted Answer

The answer of When assessing planned control risk for sales,...

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

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences?

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:

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

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?

To prevent fraud, management should deny cash access to anyone responsible for:

The occurrence objective (assertion) is of primary importance when performing transaction testing for sales. List and discuss the three potential misstatements that audit procedures are designed to detect.

Sales returns and allowances are often ignored by auditors because they are often immaterial.

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customers account that employee may be suspected of:

For effective internal control, it is important that sales be recorded as soon after the customer order is received as possible to prevent the unintentional omission of transactions from the records and to make sure that sales are recorded in the proper period.

Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties?

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?

Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.

An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

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.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?

The audit procedure referred to as proof of cash receipts is particularly useful to test:

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points.