Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue
Chapter 11
Accounts Receivable, Notes Receivable, and Revenue
True
/ False Questions
1. The department approving a sales transaction should be the
shipping department.
True False
2. Accounts receivable that are
written-off should not
be turned over to a collection agency.
True False
3. An aged trial balance of accounts receivable may provide
evidence on the adequacy of the allowance for uncollectible
accounts.
True False
4. Confirmation of accounts receivable by direct communication
with the debtor tests the existence of accounts
receivable.
True False
5. Confirmation requests should contain a "business reply"
envelope addressed to the auditors at the client's
address.
True False
6. CPAs use negative accounts receivable confirmations more
frequently than positive accounts receivable
confirmations.
True False
7. Confirmation of accounts receivable provides some assurance
that no lapping or other manipulation affecting accounts receivable
is being carried on.
True False
8. Analytical procedures are used by auditors to gain evidence
about the adequacy of the allowance for uncollectible
accounts.
True False
9. 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.
True False
10. Material accounts receivable from related parties should be
stated separately from other receivables.
True False
Multiple
Choice Questions
11. 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.
12. Which of the following is least
likely to be typically considered to be an alternate procedure for
handling nonreplies to accounts receivable confirmations?
A. Examine
bills of lading.
B. Physically examine items
sold.
C. Examine correspondence.
D. Examine
subsequent cash receipts.
13. 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.
14. Which of the following would be least
likely to diminish the validity of evidence obtained through
confirmation of accounts receivable?
A. The
confirmations are sent on the client's letterhead.
B. The
confirmations are mailed to customers by the internal
auditors.
C. The client's mailroom personnel closely
monitor and inspect confirmations during mailing.
D. The
return address on the envelope used to send the confirmation request
is that of the client.
15. 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
confirmations.
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. Confirmations will not in general be used
as the auditor will rely primarily upon support such as vendors'
invoices, purchase orders and receiving reports.
16. 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.
17. Which of the following is not
typically considered to be an alternate procedure for handling
nonreplies to accounts receivable confirmations?
A. Examine
sales invoices.
B. Inclusion of the information in the
engagement letter.
C. Examine correspondence.
D. Examine
any subsequent cash receipts.
18. 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.
19. 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.
20. 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.
21. Which of the following is most likely to be used in
determining a proper amount to be included in the allowance for
doubtful accounts?
A. Accounts receivable divided by
Cost of goods sold.
B. Aging of accounts
receivable.
C. Cash Sales divided by Accounts
receivable
D. Year 2 accounts receivable compared to year
one accounts receivable.
22. For effective internal control, the
billing function should not
be performed by the:
A. Sales
department.
B. Accounting department.
C. Finance
department.
D. Information Processing department.
23. Which procedure would be of most assistance to an auditor
discovering a large credit sale that has erroneously been recorded
twice?
A. Footing the sales journal.
B. Sending
accounts receivable confirmations.
C. Tracing the total
sales in the sales journal to the general ledger.
D. Observation
of the physical inventory count at year-end.
24. An audit basically consists of having the auditor form an
opinion regarding management's financial statement assertions. The
auditor therefore develops general and specific program steps to
apply to the accounts and transactions. In a particular case, s/he
might do this by:
A. Tracing sales invoices to
shipping documents to tests the completeness of reported
sales.
B. Tracing shipping documents to sales invoices to
test the occurrence of reported sales.
C. Tracing sales
invoices to shipping documents to test the occurrence of reported
sales.
D. Tracing sales invoices to shipping documents to
test the completeness of recorded accounts receivable.
25. The confirmation of accounts receivable is most closely
associated with
A. Business risk.
B. Detection
risk.
C. Inherent risk.
D. Relative risk.
26. Analytical procedures performed during an audit indicate
that accounts receivable doubled since the end of the prior year.
However, the allowance for doubtful accounts as a percentage of
accounts receivable remained about the same. Which of the following
client explanations would satisfy the auditor?
A. A
greater percentage of accounts receivable are listed in the "more
than 120 days overdue" category than in the prior
year.
B. Internal control activities over the recording of
cash receipts have been improved since the end of the prior
year.
C. The client opened a second retail outlet during
the current year and its credit sales approximately equaled the older
outlet.
D. The client tightened its credit policy during
the current year and sold considerably less merchandise to customers
with poor credit ratings.
27. After the CPAs have selected particular accounts receivable
for confirmation:
A. As a control measure, the CPAs
should carefully list the audited values of all of those accounts
before turning the letters over to the client to type and mail.
B. It
is important that every account selected that has a material balance
ultimately be verified by confirmation or the application of
alternative procedures; immaterial balances never require any
follow-up through alternative procedures.
C. All requests
for confirmation should be mailed in envelopes bearing the CPA firm's
return address and should include a return envelope addressed to the
CPA firm.
D. All differences between confirmation replies
and book values should be reconciled by the CPAs, rather than the
client.
28. Which of the following manipulations would understate
receivables on the financial statements?
A. Understatement
of cash sales.
B. Closing the sales journal prior to
year-end.
C. Closing the cash receipts journal prior to
year-end.
D. Underestimating the allowance for doubtful
accounts.
29. You were surprised to note that approximately 95% of
returned positive accounts receivable confirmations indicated that
the customers thought that they owed a larger balance than the amount
that had been printed by your client on the confirmation. This might
be explained by the fact that:
A. The cash receipts
journal was closed before year-end.
B. The cash receipts
journal was held open after year-end.
C. There are many
unrecorded liabilities.
D. The sales journal was held open
after year-end.
30. An auditor who uses a transaction cycle approach to
assessing control risk most likely would test control activities
related to transactions involving the sale of goods to customers with
the
A. Collection of receivables.
B. Purchase
of merchandise inventory.
C. Payment of accounts
payable.
D. Sale of long-term debt.
31. Which of the following fraudulent
activities most likely could be perpetrated due to the lack of
effective internal controls in the revenue cycle?
A. Merchandise
received is not
promptly reconciled to the outstanding purchase order
file.
B. Obsolete items included in inventory balances are
rarely reduced to the lower of cost or market value.
C. The
write-off of receivables by personnel who receive cash permits the
misappropriation of cash.
D. Fictitious transactions are
recorded that cause an understatement of revenue and overstatement of
receivables.
32. Which of the following procedures is
least
likely to help auditors to assess the adequacy of management's
accounting estimate of the allowance for doubtful
accounts?
A. Investigate confirmation exceptions for
indication of amounts in dispute.
B. Review accounts which
have been written off as uncollectible prior to
year-end.
C. Investigate credit ratings for large accounts
receivable.
D. Discuss with the credit manager the current
status of doubtful accounts.
33. Which of the following is consistent with effective internal
control over sales transactions?
A. The accounting
department prepares a shipping report authorizing the shipment of
goods.
B. The accounting department accounts for all
receiving reports.
C. The billing department accounts for
all shipping documents.
D. The accounts payable department
annually approves the extension of credit to customers.
34. Tracing recorded sales transactions to the bills of lading
provides evidence about the:
A. Completeness of sales
transactions.
B. Collectibility of sales
transactions.
C. Occurrence of sales
transactions.
D. Billing of all sales transactions.
35. To obtain the best evidence regarding the completeness of
recorded accounts receivable, the auditors:
A. Trace
a sample of the bills of lading to sales invoices.
B. Confirm
a sample of accounts payable.
C. Review the aging of
accounts receivable.
D. Trace a sample of recorded sales to
shipping documents.
36. Which of the following generally
provides the least
evidence regarding the valuation of accounts
receivable?
A. Reviewing an aging of accounts
receivable.
B. Examination of cash receipts subsequent to
the balance sheet date.
C. Confirming current (0-30 day)
year-end accounts receivable.
D. Reviewing credit files for
selected account.
37. Which of the following would indicate the need to use
positive accounts receivable confirmations?
A. A
large population consisting of small balances.
B. Good
internal control over accounts receivable.
C. Most accounts
are with large reputable companies.
D. A large number of
accounts receivable are in dispute.
38. Which of the following is not
true about the confirmation of accounts receivable?
A. Confirmation
requests should bear the auditors' return address.
B. Confirmation
requests should be signed by the auditors.
C. Confirmation
requests should be mailed directly by the auditors.
D. Confirmation
requests should include a return envelope addressed to the office of
the auditors.
39. Which of the following is not
true about the auditors' verification of notes receivable?
A. The
interest revenue on notes receivable is usually audited by
independent computation.
B. Inspecting the notes is
sufficient evidence of existence of the notes.
C. The
auditors may evaluate the collectibility of notes by inspecting
credit files.
D. Confirmation of notes payable to banks may
be accomplished in conjunction with the confirmation of cash
balances.
40. To verify that all sales that have been shipped to customers
have been recorded, a test of transactions should be completed on a
representative sample drawn from:
A. The sales
journal.
B. The billing clerk's file of sales
orders.
C. Duplicate copies of sales invoices.
D. The
shipping clerk's file of duplicate copies of bills of lading.
41. Auditors may use positive and/or negative forms of
confirmation requests for accounts receivable. Of the following,
which combination is it most likely that the auditors will
use?
A. The positive form for small balances, and the
negative form for large balances.
B. The positive form used
for large balances and the negative form for the small
balances.
C. The positive form used for trade receivables
and the negative form for other receivables.
D. The
positive form when controls related to receivables are satisfactory,
and the negative form when controls related to receivables are
unsatisfactory.
42. The auditors obtain audit evidence for accounts receivable
by using positive or negative confirmation requests. Under which of
the following circumstances might the negative form of the accounts
receivable confirmation be useful?
A. A substantial
number of accounts are in disputes.
B. The combination of
inherent risk and control risk is high.
C. Client records
include a large number of relatively small balances.
D. The
auditors believe that recipients of the requests are unlikely to give
them consideration.
43. When scheduling the audit work to be performed on an
engagement, the auditors should consider confirming accounts
receivable balances at an interim date if:
A. Subsequent
collections are to be reviewed.
B. Internal control over
receivables is good.
C. Negative confirmations are to be
used.
D. There is a simultaneous examination of cash and
accounts receivable.
44. It is sometimes impossible for the auditors to use normal
accounts receivable confirmation procedures. In such situations the
best alternative procedure the auditors might resort to would
be:
A. Examining subsequent receipts of year-end
accounts receivable.
B. Reviewing accounts receivable aging
schedules prepared at the balance sheet date and at a subsequent
date.
C. Requesting that management increase the allowance
for uncollectible accounts by an amount equal to some percentage of
the balance in those accounts that cannot be confirmed.
D. Applying
analytical procedures to accounts receivable and sales on a
year-to-year basis.
45. The audit working papers often include a client-prepared,
aged trial balance of accounts receivable as of the balance sheet
date. This aging is best used by the auditors to:
A. Consider
internal control over credit sales.
B. Test the accuracy of
recorded charge sales.
C. Estimate credit losses.
D. Verify
the validity of the recorded receivables.
46. Which of the following is not
a primary objective of the auditors in the examination of accounts
receivable?
A. Determine the approximate realizable
value.
B. Consider the adequacy of internal
control.
C. Establish the existence of
receivables.
D. Determine the expected day of collection of
each of the receivables.
47. Once a CPA has determined that accounts receivable have
increased due to slow collections in a "tight money"
environment, the CPA would be likely to:
A. Increase
the balance in the allowance for bad debts accounts.
B. Review
the going concern ramifications.
C. Review the credit and
collection policy.
D. Expand tests of collectibility.
48. Which of the following sets of duties would ordinarily be
considered basically incompatible in terms of good internal
control?
A. Preparation of monthly statements to
customers and maintenance of the accounts payable subsidiary
ledger.
B. Posting to the general ledger and approval of
additions and terminations relating to the payroll.
C. Custody
of unmailed signed checks and maintenance of expense subsidiary
ledger.
D. Collection of receipts on account and
maintaining accounts receivable records.
49. Tracing copies of sales invoices to shipping documents will
provide evidence that all
A. Shipments to customers
were recorded as receivables.
B. Billed sales were
shipped.
C. Debits to the subsidiary accounts receivable
ledger are for sales shipped.
D. Shipments to customers
were billed.
50. Which of the following is the best argument against the use
of negative accounts receivable confirmations?
A. The
cost-per-response is excessively high.
B. There is no way
of knowing if the intended recipients received them.
C. Recipients
are likely to feel that in reality the confirmation is a subtle
request for payment.
D. The inference drawn from receiving
no reply may not be correct.
51. When there are a large number of relatively small account
balances, negative confirmation of accounts receivable is feasible if
the combination of inherent risk and control risk is:
A. Low,
and the individuals receiving the confirmation requests are unlikely
to give them adequate consideration.
B. High, and the
individuals receiving the confirmation requests are likely to give
them adequate consideration.
C. High, and the individuals
receiving the confirmation requests are unlikely to give them
adequate consideration.
D. Low, and the individuals
receiving the confirmation requests are likely to give them adequate
consideration.
52. An auditor should 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. Collectibility of the receivables is in
doubt.
D. Pledging of the receivables is probable.
53. Johnson is engaged in the audit of a utility which supplies
power to a residential community. All accounts receivable balances
are small and internal control is effective. Customers are billed
bi-monthly. In order to determine the validity of the accounts
receivable balances at the balance sheet date, Johnson would most
likely:
A. Examine evidence of subsequent cash
receipts instead of sending confirmation requests.
B. Send
positive confirmation requests.
C. Send negative
confirmation requests.
D. Use statistical sampling instead
of sending confirmation requests.
54. A CPA examines a sample of copies of December and January
sales invoices for the initials of the person who verified the
quantitative data. This is an example of a:
A. Test
of a control.
B. Substantive test.
C. Cutoff
test.
D. Statistical test.
55. Which of the following is not
one of the criteria for revenue recognition?
A. Collectibility
is certain.
B. Delivery has occurred or services have been
rendered.
C. Evidence of an arrangement exists and is
persuasive.
D. A fixed or determinable price to buyer
exists.
56. In your review of ABC Company's financials, you note that
Receivables have increased approximately 200% from the previous year,
while Cash has declined. Further investigation reveals that 70% of
ABC's receivables were booked within 7 days of the end of the
quarter. If financial statement fraud is involved, which type is most
likely?
A. Fictitious revenues
B. Timing
differences
C. Improper asset valuations
D. Improper
disclosures
57. Recognizing a loan received as revenue
instead of as a liability has a positive effect on the reported
financial statements for all of the following except:
A. It
understates liabilities.
B. It overstates revenues
C. It
overstates net income.
D. It overstates assets.
58. Which of the following revenue related
transactions is not
linked to the accounts indicated?
A. Recognize
revenues too early--accounts receivable and revenue.
B. Understate
allowance for doubtful accounts--Bad debt expense, allowance for
doubtful accounts.
C. Don't write off uncollectible
receivables--sales returns, sales discounts.
D. Don't
record discounts given to customers--Cash, sales discounts, accounts
receivable.
59. The individual looking for guidance on revenue recognition
is most likely to appropriately review:
A. APB
99.
B. SAB 104.
C. ASR 44.
D. B1
Document
60. An auditor discovered that a client's
accounts receivable turnover is substantially lower for the current
year than for the prior year. This may indicate that
A. Obsolete
inventory has not
yet been reduced to fair market value.
B. There was an
improper cutoff of sales at the end of the year.
C. An
unusually large receivable was written off near the end of the
year.
D. The aging of accounts receivable was improperly
performed in both years.
Essay
Questions
61. Confirmation of accounts receivable is generally accepted
auditing procedure. In performing this procedure, auditors use
positive confirmations or negative confirmations or a combination of
both.
a. Describe three conditions which should exist for the
auditors to use the negative form of request.
b. If a response
is not received to an initial positive confirmation request, describe
the action that should be taken by the auditors, including a
discussion of alternative auditing procedures.
62. Internal control over sales transactions is very important
to the effectiveness of an organization.
a. For effective
control over credit sales, describe four major functions that should
be segregated.
b. In addition to adequate segregation of duties,
describe two other internal controls over sales transactions.
63. Fraudulent sales are occasionally recorded at year-end as a
means of overstating financial results. As examples, companies may
engage in inappropriate bill and hold transactions or channel
stuffing.
a. Describe two conditions that might indicate the
recording of fraudulent sales.
b. Define bill and hold
transactions and describe the audit significance of such
transactions.
c. Define channel stuffing and describe the audit
significance of this practice.
Chapter
11 Accounts Receivable, Notes Receivable, and Revenue Answer
Key
True
/ False Questions
1. The department approving a sales
transaction should be the shipping department.
FALSE
Difficulty:
Easy
2. Accounts receivable that are
written-off should not
be turned over to a collection agency.
FALSE
Difficulty:
Easy
3. An aged trial balance of accounts
receivable may provide evidence on the adequacy of the allowance for
uncollectible accounts.
TRUE
Difficulty:
Easy
4. Confirmation of accounts receivable by
direct communication with the debtor tests the existence of accounts
receivable.
TRUE
Difficulty:
Easy
5. Confirmation requests should contain a
"business reply" envelope addressed to the auditors at the
client's address.
FALSE
Difficulty:
Medium
6. CPAs use negative accounts receivable
confirmations more frequently than positive accounts receivable
confirmations.
FALSE
Difficulty:
Medium
7. Confirmation of accounts receivable
provides some assurance that no lapping or other manipulation
affecting accounts receivable is being carried on.
TRUE
Difficulty:
Medium
8. Analytical procedures are used by
auditors to gain evidence about the adequacy of the allowance for
uncollectible accounts.
TRUE
Difficulty:
Medium
9. 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.
TRUE
Difficulty:
Medium
10. Material accounts receivable from
related parties should be stated separately from other
receivables.
TRUE
Difficulty:
Easy
Multiple
Choice Questions
11. 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.
Difficulty:
Hard
12. Which of the following is least
likely to be typically considered to be an alternate procedure for
handling nonreplies to accounts receivable confirmations?
A. Examine
bills of lading.
B. Physically
examine items sold.
C. Examine
correspondence.
D. Examine
subsequent cash receipts.
Difficulty:
Medium
13. 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.
Difficulty:
Hard
14. Which of the following would be least
likely to diminish the validity of evidence obtained through
confirmation of accounts receivable?
A. The
confirmations are sent on the client's letterhead.
B. The
confirmations are mailed to customers by the internal
auditors.
C. The
client's mailroom personnel closely monitor and inspect confirmations
during mailing.
D. The
return address on the envelope used to send the confirmation request
is that of the client.
Difficulty:
Medium
15. 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
confirmations.
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. Confirmations
will not in general be used as the auditor will rely primarily upon
support such as vendors' invoices, purchase orders and receiving
reports.
Difficulty:
Medium
16. 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.
Difficulty:
Medium
17. Which of the following is not
typically considered to be an alternate procedure for handling
nonreplies to accounts receivable confirmations?
A. Examine
sales invoices.
B. Inclusion
of the information in the engagement letter.
C. Examine
correspondence.
D. Examine
any subsequent cash receipts.
Difficulty:
Medium
18. 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.
Difficulty:
Hard
19. 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.
Difficulty:
Medium
20. 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.
Difficulty:
Medium
21. Which of the following is most likely
to be used in determining a proper amount to be included in the
allowance for doubtful accounts?
A. Accounts
receivable divided by Cost of goods sold.
B. Aging
of accounts receivable.
C. Cash
Sales divided by Accounts receivable
D. Year
2 accounts receivable compared to year one accounts receivable.
Difficulty:
Medium
22. For effective internal control, the
billing function should not
be performed by the:
A. Sales
department.
B. Accounting
department.
C. Finance
department.
D. Information
Processing department.
Difficulty:
Medium
23. Which procedure would be of most
assistance to an auditor discovering a large credit sale that has
erroneously been recorded twice?
A. Footing
the sales journal.
B. Sending
accounts receivable confirmations.
C. Tracing
the total sales in the sales journal to the general
ledger.
D. Observation
of the physical inventory count at year-end.
Difficulty:
Medium
24. An audit basically consists of having
the auditor form an opinion regarding management's financial
statement assertions. The auditor therefore develops general and
specific program steps to apply to the accounts and transactions. In
a particular case, s/he might do this by:
A. Tracing
sales invoices to shipping documents to tests the completeness of
reported sales.
B. Tracing
shipping documents to sales invoices to test the occurrence of
reported sales.
C. Tracing
sales invoices to shipping documents to test the occurrence of
reported sales.
D. Tracing
sales invoices to shipping documents to test the completeness of
recorded accounts receivable.
Difficulty:
Hard
25. The confirmation of accounts
receivable is most closely associated with
A. Business
risk.
B. Detection
risk.
C. Inherent
risk.
D. Relative
risk.
Difficulty:
Medium
26. Analytical procedures performed during
an audit indicate that accounts receivable doubled since the end of
the prior year. However, the allowance for doubtful accounts as a
percentage of accounts receivable remained about the same. Which of
the following client explanations would satisfy the auditor?
A. A
greater percentage of accounts receivable are listed in the "more
than 120 days overdue" category than in the prior
year.
B. Internal
control activities over the recording of cash receipts have been
improved since the end of the prior year.
C. The
client opened a second retail outlet during the current year and its
credit sales approximately equaled the older outlet.
D. The
client tightened its credit policy during the current year and sold
considerably less merchandise to customers with poor credit ratings.
Difficulty:
Medium
Source: AICPA
27. After the CPAs have selected
particular accounts receivable for confirmation:
A. As
a control measure, the CPAs should carefully list the audited values
of all of those accounts before turning the letters over to the
client to type and mail.
B. It
is important that every account selected that has a material balance
ultimately be verified by confirmation or the application of
alternative procedures; immaterial balances never require any
follow-up through alternative procedures.
C. All
requests for confirmation should be mailed in envelopes bearing the
CPA firm's return address and should include a return envelope
addressed to the CPA firm.
D. All
differences between confirmation replies and book values should be
reconciled by the CPAs, rather than the client.
Difficulty:
Medium
28. Which of the following manipulations
would understate receivables on the financial
statements?
A. Understatement
of cash sales.
B. Closing
the sales journal prior to year-end.
C. Closing
the cash receipts journal prior to year-end.
D. Underestimating
the allowance for doubtful accounts.
Difficulty:
Easy
29. You were surprised to note that
approximately 95% of returned positive accounts receivable
confirmations indicated that the customers thought that they owed a
larger balance than the amount that had been printed by your client
on the confirmation. This might be explained by the fact
that:
A. The
cash receipts journal was closed before year-end.
B. The
cash receipts journal was held open after year-end.
C. There
are many unrecorded liabilities.
D. The
sales journal was held open after year-end.
Difficulty:
Medium
30. An auditor who uses a transaction
cycle approach to assessing control risk most likely would test
control activities related to transactions involving the sale of
goods to customers with the
A. Collection
of receivables.
B. Purchase
of merchandise inventory.
C. Payment
of accounts payable.
D. Sale
of long-term debt.
Difficulty:
Medium
Source: AICPA
31. Which of the following fraudulent
activities most likely could be perpetrated due to the lack of
effective internal controls in the revenue cycle?
A. Merchandise
received is not
promptly reconciled to the outstanding purchase order
file.
B. Obsolete
items included in inventory balances are rarely reduced to the lower
of cost or market value.
C. The
write-off of receivables by personnel who receive cash permits the
misappropriation of cash.
D. Fictitious
transactions are recorded that cause an understatement of revenue and
overstatement of receivables.
Difficulty:
Hard
Source: AICPA
32. Which of the following procedures is
least
likely to help auditors to assess the adequacy of management's
accounting estimate of the allowance for doubtful
accounts?
A. Investigate
confirmation exceptions for indication of amounts in
dispute.
B. Review
accounts which have been written off as uncollectible prior to
year-end.
C. Investigate
credit ratings for large accounts receivable.
D. Discuss
with the credit manager the current status of doubtful accounts.
Difficulty:
Hard
33. Which of the following is consistent
with effective internal control over sales transactions?
A. The
accounting department prepares a shipping report authorizing the
shipment of goods.
B. The
accounting department accounts for all receiving reports.
C. The
billing department accounts for all shipping documents.
D. The
accounts payable department annually approves the extension of credit
to customers.
Difficulty:
Hard
34. Tracing recorded sales transactions to
the bills of lading provides evidence about the:
A. Completeness
of sales transactions.
B. Collectibility
of sales transactions.
C. Occurrence
of sales transactions.
D. Billing
of all sales transactions.
Difficulty:
Medium
35. To obtain the best evidence regarding
the completeness of recorded accounts receivable, the
auditors:
A. Trace
a sample of the bills of lading to sales invoices.
B. Confirm
a sample of accounts payable.
C. Review
the aging of accounts receivable.
D. Trace
a sample of recorded sales to shipping documents.
Difficulty:
Medium
36. Which of the following generally
provides the least
evidence regarding the valuation of accounts
receivable?
A. Reviewing
an aging of accounts receivable.
B. Examination
of cash receipts subsequent to the balance sheet date.
C. Confirming
current (0-30 day) year-end accounts receivable.
D. Reviewing
credit files for selected account.
Difficulty:
Hard
37. Which of the following would indicate
the need to use positive accounts receivable confirmations?
A. A
large population consisting of small balances.
B. Good
internal control over accounts receivable.
C. Most
accounts are with large reputable companies.
D. A
large number of accounts receivable are in dispute.
Difficulty:
Medium
38. Which of the following is not
true about the confirmation of accounts receivable?
A. Confirmation
requests should bear the auditors' return address.
B. Confirmation
requests should be signed by the auditors.
C. Confirmation
requests should be mailed directly by the auditors.
D. Confirmation
requests should include a return envelope addressed to the office of
the auditors.
Difficulty:
Easy
39. Which of the following is not
true about the auditors' verification of notes receivable?
A. The
interest revenue on notes receivable is usually audited by
independent computation.
B. Inspecting
the notes is sufficient evidence of existence of the notes.
C. The
auditors may evaluate the collectibility of notes by inspecting
credit files.
D. Confirmation
of notes payable to banks may be accomplished in conjunction with the
confirmation of cash balances.
Difficulty:
Medium
40. To verify that all sales that have
been shipped to customers have been recorded, a test of transactions
should be completed on a representative sample drawn from:
A. The
sales journal.
B. The
billing clerk's file of sales orders.
C. Duplicate
copies of sales invoices.
D. The
shipping clerk's file of duplicate copies of bills of lading.
Difficulty:
Medium
41. Auditors may use positive and/or
negative forms of confirmation requests for accounts receivable. Of
the following, which combination is it most likely that the auditors
will use?
A. The
positive form for small balances, and the negative form for large
balances.
B. The
positive form used for large balances and the negative form for the
small balances.
C. The
positive form used for trade receivables and the negative form for
other receivables.
D. The
positive form when controls related to receivables are satisfactory,
and the negative form when controls related to receivables are
unsatisfactory.
Difficulty:
Easy
42. The auditors obtain audit evidence for
accounts receivable by using positive or negative confirmation
requests. Under which of the following circumstances might the
negative form of the accounts receivable confirmation be
useful?
A. A
substantial number of accounts are in disputes.
B. The
combination of inherent risk and control risk is high.
C. Client
records include a large number of relatively small balances.
D. The
auditors believe that recipients of the requests are unlikely to give
them consideration.
Difficulty:
Easy
Source: AICPA
43. When scheduling the audit work to be
performed on an engagement, the auditors should consider confirming
accounts receivable balances at an interim date if:
A. Subsequent
collections are to be reviewed.
B. Internal
control over receivables is good.
C. Negative
confirmations are to be used.
D. There
is a simultaneous examination of cash and accounts receivable.
Difficulty:
Medium
Source: AICPA
44. It is sometimes impossible for the
auditors to use normal accounts receivable confirmation procedures.
In such situations the best alternative procedure the auditors might
resort to would be:
A. Examining
subsequent receipts of year-end accounts receivable.
B. Reviewing
accounts receivable aging schedules prepared at the balance sheet
date and at a subsequent date.
C. Requesting
that management increase the allowance for uncollectible accounts by
an amount equal to some percentage of the balance in those accounts
that cannot be confirmed.
D. Applying
analytical procedures to accounts receivable and sales on a
year-to-year basis.
Difficulty:
Hard
Source: AICPA
45. The audit working papers often include
a client-prepared, aged trial balance of accounts receivable as of
the balance sheet date. This aging is best used by the auditors
to:
A. Consider
internal control over credit sales.
B. Test
the accuracy of recorded charge sales.
C. Estimate
credit losses.
D. Verify
the validity of the recorded receivables.
Difficulty:
Medium
Source: AICPA
46. Which of the following is not
a primary objective of the auditors in the examination of accounts
receivable?
A. Determine
the approximate realizable value.
B. Consider
the adequacy of internal control.
C. Establish
the existence of receivables.
D. Determine
the expected day of collection of each of the receivables.
Difficulty:
Medium
Source: AICPA
47. Once a CPA has determined that
accounts receivable have increased due to slow collections in a
"tight money" environment, the CPA would be likely
to:
A. Increase
the balance in the allowance for bad debts accounts.
B. Review
the going concern ramifications.
C. Review
the credit and collection policy.
D. Expand
tests of collectibility.
Difficulty:
Hard
Source: AICPA
48. Which of the following sets of duties
would ordinarily be considered basically incompatible in terms of
good internal control?
A. Preparation
of monthly statements to customers and maintenance of the accounts
payable subsidiary ledger.
B. Posting
to the general ledger and approval of additions and terminations
relating to the payroll.
C. Custody
of unmailed signed checks and maintenance of expense subsidiary
ledger.
D. Collection
of receipts on account and maintaining accounts receivable records.
Difficulty:
Medium
Source: AICPA
49. Tracing copies of sales invoices to
shipping documents will provide evidence that all
A. Shipments
to customers were recorded as receivables.
B. Billed
sales were shipped.
C. Debits
to the subsidiary accounts receivable ledger are for sales
shipped.
D. Shipments
to customers were billed.
Difficulty:
Medium
Source: AICPA
50. Which of the following is the best
argument against the use of negative accounts receivable
confirmations?
A. The
cost-per-response is excessively high.
B. There
is no way of knowing if the intended recipients received
them.
C. Recipients
are likely to feel that in reality the confirmation is a subtle
request for payment.
D. The
inference drawn from receiving no reply may not be correct.
Difficulty:
Medium
Source: AICPA
51. When there are a large number of
relatively small account balances, negative confirmation of accounts
receivable is feasible if the combination of inherent risk and
control risk is:
A. Low,
and the individuals receiving the confirmation requests are unlikely
to give them adequate consideration.
B. High,
and the individuals receiving the confirmation requests are likely to
give them adequate consideration.
C. High,
and the individuals receiving the confirmation requests are unlikely
to give them adequate consideration.
D. Low,
and the individuals receiving the confirmation requests are likely to
give them adequate consideration.
Difficulty:
Medium
Source: AICPA
52. An auditor should 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. Collectibility
of the receivables is in doubt.
D. Pledging
of the receivables is probable.
Difficulty:
Easy
Source: AICPA
53. Johnson is engaged in the audit of a
utility which supplies power to a residential community. All accounts
receivable balances are small and internal control is effective.
Customers are billed bi-monthly. In order to determine the validity
of the accounts receivable balances at the balance sheet date,
Johnson would most likely:
A. Examine
evidence of subsequent cash receipts instead of sending confirmation
requests.
B. Send
positive confirmation requests.
C. Send
negative confirmation requests.
D. Use
statistical sampling instead of sending confirmation requests.
Difficulty:
Medium
Source: AICPA
54. A CPA examines a sample of copies of
December and January sales invoices for the initials of the person
who verified the quantitative data. This is an example of a:
A. Test
of a control.
B. Substantive
test.
C. Cutoff
test.
D. Statistical
test.
Difficulty:
Easy
Source: AICPA
55. Which of the following is not
one of the criteria for revenue recognition?
A. Collectibility
is certain.
B. Delivery
has occurred or services have been rendered.
C. Evidence
of an arrangement exists and is persuasive.
D. A
fixed or determinable price to buyer exists.
Difficulty:
Hard
56. In your review of ABC Company's
financials, you note that Receivables have increased approximately
200% from the previous year, while Cash has declined. Further
investigation reveals that 70% of ABC's receivables were booked
within 7 days of the end of the quarter. If financial statement fraud
is involved, which type is most likely?
A. Fictitious
revenues
B. Timing
differences
C. Improper
asset valuations
D. Improper
disclosures
Difficulty:
Hard
57. Recognizing a loan received as revenue
instead of as a liability has a positive effect on the reported
financial statements for all of the following except:
A. It
understates liabilities.
B. It
overstates revenues
C. It
overstates net income.
D. It
overstates assets.
Difficulty:
Hard
58. Which of the following revenue related
transactions is not
linked to the accounts indicated?
A. Recognize
revenues too early--accounts receivable and revenue.
B. Understate
allowance for doubtful accounts--Bad debt expense, allowance for
doubtful accounts.
C. Don't
write off uncollectible receivables--sales returns, sales
discounts.
D. Don't
record discounts given to customers--Cash, sales discounts, accounts
receivable.
Difficulty:
Medium
59. The individual looking for guidance on
revenue recognition is most likely to appropriately review:
A. APB
99.
B. SAB
104.
C. ASR
44.
D. B1
Document
Difficulty:
Medium
60. An auditor discovered that a client's
accounts receivable turnover is substantially lower for the current
year than for the prior year. This may indicate that
A. Obsolete
inventory has not
yet been reduced to fair market value.
B. There
was an improper cutoff of sales at the end of the year.
C. An
unusually large receivable was written off near the end of the
year.
D. The
aging of accounts receivable was improperly performed in both years.
Difficulty:
Hard
Source: AICPA
Essay
Questions
61. Confirmation of accounts receivable is generally accepted
auditing procedure. In performing this procedure, auditors use
positive confirmations or negative confirmations or a combination of
both.
a. Describe three conditions which should exist for the
auditors to use the negative form of request.
b. If a response
is not received to an initial positive confirmation request, describe
the action that should be taken by the auditors, including a
discussion of alternative auditing procedures.
a. The conditions that should exist for the
auditors to use negative confirmation requests include:
1. The
combined assessed level of inherent and control risk is low,
2.
A large number of small balances, and
3. Reason to believe the
person receiving the confirmation will give it consideration.
b.
If the initial response to a positive confirmation is not received,
the auditors should:
1. Send a second request.
2. Consider
sending a third request or telephoning the customer.
3. For
significant nonrespondents perform alternative auditing procedures
including:
Examining subsequent cash receipts.
Vouching transactions making up the account balance to invoices and
shipping documents.
Establishing the validity of the customer.
Difficulty:
Medium
62. Internal control over sales transactions is very important
to the effectiveness of an organization.
a. For effective
control over credit sales, describe four major functions that should
be segregated.
b. In addition to adequate segregation of duties,
describe two other internal controls over sales transactions.
a. Functions that should be segregated to
provide for effective internal control over sales transactions
include (only four required):
Authorization of sales.
Credit approval.
Issuance of merchandise from stock.
Shipping of merchandise.
Billing of accounts.
Maintenance of accounting records.
b. Other internal controls
over sales transactions include (only two required):
Verification of invoices.
Prenumbered shipping documents that are accounted for by the billing
department.
Credit approval obtained prior to shipment of goods.
Mailing of monthly customer statements.
Control over written-off receivables.
Difficulty:
Medium
63. Fraudulent sales are occasionally recorded at year-end as a
means of overstating financial results. As examples, companies may
engage in inappropriate bill and hold transactions or channel
stuffing.
a. Describe two conditions that might indicate the
recording of fraudulent sales.
b. Define bill and hold
transactions and describe the audit significance of such
transactions.
c. Define channel stuffing and describe the audit
significance of this practice.
a. The following conditions may indicate the
recording of fraudulent transactions:
Unusually large increases in year-end sales to a single customer or a
few.
Large increases in revenue and receivables along with increases in
gross profit margins that are inconsistent with the client's
experience or industry averages.
Inappropriate changes in accounting principles that result in an
increase in recorded revenue.
Substantial sales returns following the balance sheet date.
b.
Bill and hold transactions are sales that are billed but goods are
not shipped. The audit significance is that stringent accounting
requirements must be met for the transaction to qualify as sales.
c.
Channel stuffing involves providing large inducements to resellers to
buy substantially more inventory than they can resell in a normal
period of time. The audit significance is that an adequate allowance
for sales returns must be established to appropriately account for
the transactions.
Difficulty:
Hard
11-
CONFIGURING USER STATE MANAGEMENT FEATURES 73 CHAPTER 7 IMPLEMENTING
INTERPOLATION 41 CHAPTER 5 INTERPOLATION THIS CHAPTER SUMMARIZES POLYNOMIAL
PREPARING FOR PRODUCTION DEPLOYMENT 219 CHAPTER 4 DESIGNING A
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