Auditing ch 16

Auditors are especially concerned with three aspects of system of internal control for the sales and collection cycle. Which of the following is not one of their major​ concerns?

a. controls related to the allowance for uncollectible accounts

b. controls that prevent or detect embezzlements

c. controls over cutoff

d. controls over sales discounts

d. controls over sales discounts

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

a. reduce the extent of tests details of balances

b. reduce the extent of tests of controls

c. reduce the tests of transactions

d. reduce all of the other tests.

a. reduce the extent of tests details of balances

A high inherent risk increases planned detection risk and decreases planned substantive tests. T/F

False

An auditor is performing a credit analysis of customers with balances over 60 days due.​ She/he is most likely obtaining evidence for which audit-related objective?

a. occurrence

b. existence

c. realizable value

d. completeness

c. realizable value

If the client's system of internal control for recording sales returns and allowances is evaluated as ineffective,

a. a larger sample may be needed to verify cutoff

b. sampling is not appropriate

c. all sales returns must be traced to supporting documentation

d. all sales returns must be confirmed with the customer

a. a larger sample may be needed to verify cutoff

The most effective audit evidence gathered for accounts receivable is the

a. detail tie-in of the records

b. analysis of the allowance for doubtful accounts

c. confirmation of accounts receivable

d. examination of sales invoices

c. confirmation of accounts receivable

When should auditors not perform alternative procedures in testing the accounts receivable​ balance?

a. when confirmations are too costly to use

b. when customers do not return negative confirmation requests

c. when customers do not return positive confirmation requests

d. when confirmations are deemed to be ineffective as an audit procedure

b. when customers do not return negative confirmation requests

The auditor is reviewing the receivables listed on the aged trial balance for notes and related party receivables. Which balance-related audit objective is he trying to satisfy?

a. existence

b. classification

c. detail tie-in

d. all of the above

b. classification

To determine if the client has rights to the A/R , the auditor should inquire of management if any receivables are pledged or factored. T/F

True

Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective. T/F

True

For most​ audits, revenue recognition is considered to be a significant risk. T/F

True

Analytical procedures

a. performed during the detailed testing phase are done before tests of details of balances.

b. are performed only on accounts​ receivable, not on the entire sales and collection cycle.

c. are only done during the planning of the audit and when performing detailed tests.

d. performed during the detailed testing phase are done before the balance sheet date.

a. performed during the detailed testing phase are done before tests of details of balances.

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is

a. overstatement or understatement of sales returns and allowances.

b. overstatement or understatement of sales.

c. overstatement or understatement of accounts receivable.

d. overstatement or understatement of bad debt expense.

d. overstatement or understatement of bad debt expense.

The understatement of sales and accounts receivable is best uncovered by

a. testing the aged accounts receivable trial balance.

b. testing system of internal controls.

c. substantive tests of transactions for bad debts.

d. substantive tests of transactions for shipments made but not recorded.

d. substantive tests of transactions for shipments made but not recorded.

Audit procedures designed to uncover credit sales made after the​ client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit​ objectives?

a. cutoff

b. existence

c. realizable value

d. accuracy

a. cutoff

The most important test of details of balances to determine the existence of recorded accounts receivable is

a. tracing the credits in accounts receivable to bank deposits.

b. tracing sales returns entries to credit memos issued and receiving room reports.

c. the confirmation of​ customers' balances.

d. tracing details of sales invoices to shipping documents.

c. the confirmation of​ customers' balances.

A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents

a. A cutoff misstatement: No; A timing difference: No

b. A cutoff misstatement: Yes; A timing difference: Yes

c. A cutoff misstatement: No; A timing difference: Yes

d. A cutoff misstatement: Yes; A timing difference: No

c. A cutoff misstatement: No; A timing difference: Yes

When do most companies record sales returns and​ allowances?

a. whenever the customer contacts the company regarding the credit

b. during the month after the sale occurs

c. during the month in which the sale occurs

d. during the accounting period in which the return occurs

d. during the accounting period in which the return occurs

If​ material, all of the following are required to be separately disclosed in the financial statements except for

a. sales and assets for different business segments.

b. sales for the last ten days of the fiscal year.

c. accounts receivable from officers.

d. accounts receivable from affiliates.

b. sales for the last ten days of the fiscal year.

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a

a. negative confirmation

b. representation letter

c. bank confirmation

d. positive confirmation

d. positive confirmation

If the auditor decides not to confirm accounts receivable that are​ material, the auditor should

a. document the reasons for such a decision in the audit files.

b. always use alternative procedures to audit the accounts receivable.

c. include copies of customer sales invoices in the audit files.

d. include copies of customer statements in the audit files.

a. document the reasons for such a decision in the audit files.

When a customer disagrees with the amount shown on an account receivable​ confirmation, the auditor should not ask the client to reconcile the difference. T/F

False

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to​ respond, which action should the auditor​ take?

a. Send out a third confirmation request​ and, if no​ response, perform alternative procedures.

b. Consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results.

c. Issue a qualified opinion due to the lack of sufficient audit evidence.

d. Provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer.

a. Send out a third confirmation request​ and, if no​ response, perform alternative procedures.

Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable​ turnover?

a. Allowance of a new grace period for customer payments

b. Tightening of credit policy

c. Implementation of more aggressive collection policies

d. Early payment incentives for customers

a. Allowance of a new grace period for customer payments

An auditor who is auditing accounts receivable would least likely perform which of the following​ tests?

a. Select cash disbursements made shortly after​ year-end and examine the supporting documentation such as receiving reports and vendor invoices.

b. Confirm a sample of accounts receivables with the customers that owe the balances.

c. Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.

d. Vouch cash receipts to the accounts receivables transactions.

a. Select cash disbursements made shortly after​ year-end and examine the supporting documentation such as receiving reports and vendor invoices.