Question 1

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?

Accepted Answer

Over-recorded sales due to a lack of control over the sales entry function.

Question 2

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Accepted Answer

Assess the allowance for uncollectible accounts for reasonableness.

Question 3

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Accepted Answer

Recording sales when the customer is likely to return the goods.

Question 4

Which of the following is an example of misappropriation of assets relating to sales?

Accepted Answer

Theft of cash register sales.

Question 5

The auditors should confirm accounts receivable unless the auditors’ assessment of the risk of material misstatement is low:

Accepted Answer

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Question 6

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Accepted Answer

Delivery has occurred or is scheduled to occur in the near future.

Question 7

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Accepted Answer

Shipping documents file.

Question 8

Which of the following would most likely be detected by an auditor’s review of the client’s sales cutoff?

Accepted Answer

Inflated sales for the year.

Question 9

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

Accepted Answer

Accounts receivable subsidiary ledger.

Question 10

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?

Accepted Answer

Completeness

Question 11

CPA is auditing the FS of a municipality. The receivable balances represent delinquent real estate taxes. IC at the municipality is weak. To determine the existence of the AR balances at the balance sheet date, Cooper would most likely:

Accepted Answer

Send positive confirmation requests.

Question 12

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:

Accepted Answer

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

Question 13

Requested responses directly from customers as to amounts due.

Accepted Answer

Confirmation - Substantive Procedure

Question 14

Compared total bad debts this year with the totals for the previous two years.

Accepted Answer

Analytical Procedure - Substantive Procedure

Question 15

Questioned management about likely total uncollectible accounts.

Accepted Answer

Inquiry - Substantive Procedures

Question 16

Watched the accounting clerk record the daily deposit of cash receipts.

Accepted Answer

Observation - Test of Controls

Question 17

Examined invoice to obtain evidence in support of the ending recorded balance of a customer.

Accepted Answer

Inspection of Records/Docs - Substantive Procedures

Question 18

Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list.

Accepted Answer

Reperformance - Test of Controls

Question 19

Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval.

Accepted Answer

Observation - Test of Controls

Question 20

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared.

Accepted Answer

False

Question 21

When merchandise is shipped, the shipping department completes a document known as a sales order.

Accepted Answer

False

Question 22

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents.

Accepted Answer

False

Question 23

When properly controlled, serial numbers on shipping documents and sales invoices may be used to help provide assurance that all goods shipped are billed to customers and recorded as sales.

Accepted Answer

True

Question 24

The accounts receivable section of the accounting department should open incoming mail and post checks and credit card payments to the customer’s accounts.

Accepted Answer

False

Question 25

Recording sales in the sales journal directly from purchase orders improves internal control by eliminating the need for sales invoices.

Accepted Answer

False

Question 26

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month.

Accepted Answer

False

Question 27

Receivables judged to be uncollectible should be written off.

Accepted Answer

True

Question 28

Tracing a sample of shipping documents to recorded sales is designed to test the completeness of recorded sales.

Accepted Answer

True

Question 29

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office.

Accepted Answer

True

Question 30

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable.

Accepted Answer

False

Question 31

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned.

Accepted Answer

False

Question 32

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances.

Accepted Answer

True

Question 33

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors.

Accepted Answer

False

Question 34

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements.

Accepted Answer

False

Question 35

Accounts receivable should be valued at their net realizable value.

Accepted Answer

True

Question 36

Inspection of notes receivable is adequate evidence of the existence of the notes.

Accepted Answer

False

Question 37

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note.

Accepted Answer

False

Question 38

Accounts receivable that are pledged as collateral for loans should be reclassified as noncur­rent assets.

Accepted Answer

False

Question 39

A note receivable from an officer is considered a related party receivable.

Accepted Answer

True

Question 40

Smith Company's AR clerk has a friend who is a customer. The AR clerk, on occasion, has issued fictitious credit memoran­dums to his friend for goods supposedly returned. The most effective procedure for prevent­ing this activity is to:

Accepted Answer

require receiving reports to support all credit memorandums before they are ap­proved.

Question 41

For effective internal control, the billing function should be performed by the:

Accepted Answer

accounting department.

Question 42

Which of the following is an effective control over accounts receivable?

Accepted Answer

The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.

Question 43

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when:

Accepted Answer

there is reason to believe that a substantial number of accounts may be in dispute.

Question 44

The auditor is examining electronic copies of sales invoices for the initials of the person responsible for approving credit sales. This is an example of a:

Accepted Answer

test of controls.

Question 45

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following?

Accepted Answer

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Question 46

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

Accepted Answer

Trace sample of initial sales slips through summaries to recorded general ledger sales.

Question 47

The auditors have not been able to confirm a large AR, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing proce­dures. The auditors' report on the financial statements should include:

Accepted Answer

neither a comment on the use of alternative auditing procedures nor an opinion qualification.

Question 48

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review?

Accepted Answer

Analyze transactions occurring within a few days before and after year-end.

Question 49

The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a:

Accepted Answer

substantive procedure.

Question 50

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Accepted Answer

Have customers send payments directly to the company's depository bank.

Question 51

Which of the following is a control over notes receivable?

Accepted Answer

The custodian of notes receivable does not have access to cash received on notes.

Question 52

Recording of sales made in the subsequent period.

Accepted Answer

Comparing recorded sales several days before and after the balance sheet date with shipping documents.

Question 53

Failing to record all sales transactions.

Accepted Answer

Tracing a sample of shipping documents to recorded sales transactions.

Question 54

Recording fictitious accounts receivable.

Accepted Answer

Confirming a sample of accounts receivable.

Question 55

Failing to inform the auditors of pledged accounts receivable.

Accepted Answer

Reviewing standard confirmations from financial institutions.

Question 56

Confirmation requests should be mailed by the client under the careful supervision of the CPAs.

Accepted Answer

Incorrect

Question 57

Only material accounts need be confirmed.

Accepted Answer

Incorrect

Question 58

Overall, positive confirmation requests are ordinarily considered to result in more reliable evidence than negative requests.

Accepted Answer

Correct

Question 59

A combination of positive and negative requests may be used.

Accepted Answer

Correct

Question 60

Confirmations address completeness more than they address existence.

Accepted Answer

Incorrect

Question 61

Second requests are more frequently used for negative confirmation requests than for positive confirmation requests.

Accepted Answer

Incorrect

Question 62

Since they represent evidence obtained from an external source, confirmation replies from customers are considered to provide more reliable information than the client’s records and always accepted as the proper audited balance.

Accepted Answer

Incorrect

Question 63

Confirmation replies should be addressed directly to the CPAs at the client’s address.

Accepted Answer

Incorrect

Question 64

If the misstatements identified by the confirmation process are in total immaterial, the auditors may still conclude that the account is materially overstated.

Accepted Answer

Correct

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Auditing Chapter 11

Audit Exam 3

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