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Auditing Chapter 11
Audit Exam 3
| Question | Answer |
|---|---|
| Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? | Over-recorded sales due to a lack of control over the sales entry function. |
| Which of the following would provide the most assurance concerning the valuation of accounts receivable? | Assess the allowance for uncollectible accounts for reasonableness. |
| Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? | Recording sales when the customer is likely to return the goods. |
| Which of the following is an example of misappropriation of assets relating to sales? | Theft of cash register sales. |
| The auditors should confirm accounts receivable unless the auditors’ assessment of the risk of material misstatement is low: | And accounts receivable are immaterial, or the use of confirmations would be ineffective. |
| Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? | Delivery has occurred or is scheduled to occur in the near future. |
| To determine that all sales have been recorded, the auditors would select a sample of transactions from the: | Shipping documents file. |
| Which of the following would most likely be detected by an auditor’s review of the client’s sales cutoff? | Inflated sales for the year. |
| To test the existence assertion for recorded receivables, the auditors would select a sample from the: | Accounts receivable subsidiary ledger. |
| Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? | Completeness |
| 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: | Send positive confirmation requests. |
| 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: | Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. |
| Requested responses directly from customers as to amounts due. | Confirmation - Substantive Procedure |
| Compared total bad debts this year with the totals for the previous two years. | Analytical Procedure - Substantive Procedure |
| Questioned management about likely total uncollectible accounts. | Inquiry - Substantive Procedures |
| Watched the accounting clerk record the daily deposit of cash receipts. | Observation - Test of Controls |
| Examined invoice to obtain evidence in support of the ending recorded balance of a customer. | Inspection of Records/Docs - Substantive Procedures |
| Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list. | Reperformance - Test of Controls |
| Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval. | Observation - Test of Controls |
| Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared. | False |
| When merchandise is shipped, the shipping department completes a document known as a sales order. | False |
| The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents. | False |
| 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. | True |
| The accounts receivable section of the accounting department should open incoming mail and post checks and credit card payments to the customer’s accounts. | False |
| Recording sales in the sales journal directly from purchase orders improves internal control by eliminating the need for sales invoices. | False |
| The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month. | False |
| Receivables judged to be uncollectible should be written off. | True |
| Tracing a sample of shipping documents to recorded sales is designed to test the completeness of recorded sales. | True |
| The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office. | True |
| Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable. | False |
| The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned. | False |
| The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances. | True |
| Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors. | False |
| When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements. | False |
| Accounts receivable should be valued at their net realizable value. | True |
| Inspection of notes receivable is adequate evidence of the existence of the notes. | False |
| The best evidence of interest revenue on notes receivable is confirmation with the maker of the note. | False |
| Accounts receivable that are pledged as collateral for loans should be reclassified as noncurrent assets. | False |
| A note receivable from an officer is considered a related party receivable. | True |
| 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: | require receiving reports to support all credit memorandums before they are approved. |
| For effective internal control, the billing function should be performed by the: | accounting department. |
| Which of the following is an effective control over accounts receivable? | The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. |
| The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: | there is reason to believe that a substantial number of accounts may be in dispute. |
| 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: | test of controls. |
| 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? | An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. |
| Which of the following audit procedures is most effective in testing credit sales for understatement? | Trace sample of initial sales slips through summaries to recorded general ledger sales. |
| 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: | neither a comment on the use of alternative auditing procedures nor an opinion qualification. |
| 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? | Analyze transactions occurring within a few days before and after year-end. |
| The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a: | substantive procedure. |
| Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? | Have customers send payments directly to the company's depository bank. |
| Which of the following is a control over notes receivable? | The custodian of notes receivable does not have access to cash received on notes. |
| Recording of sales made in the subsequent period. | Comparing recorded sales several days before and after the balance sheet date with shipping documents. |
| Failing to record all sales transactions. | Tracing a sample of shipping documents to recorded sales transactions. |
| Recording fictitious accounts receivable. | Confirming a sample of accounts receivable. |
| Failing to inform the auditors of pledged accounts receivable. | Reviewing standard confirmations from financial institutions. |
| Confirmation requests should be mailed by the client under the careful supervision of the CPAs. | Incorrect |
| Only material accounts need be confirmed. | Incorrect |
| Overall, positive confirmation requests are ordinarily considered to result in more reliable evidence than negative requests. | Correct |
| A combination of positive and negative requests may be used. | Correct |
| Confirmations address completeness more than they address existence. | Incorrect |
| Second requests are more frequently used for negative confirmation requests than for positive confirmation requests. | Incorrect |
| 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. | Incorrect |
| Confirmation replies should be addressed directly to the CPAs at the client’s address. | Incorrect |
| If the misstatements identified by the confirmation process are in total immaterial, the auditors may still conclude that the account is materially overstated. | Correct |
| Test of control results may result in the need to confirm fewer accounts. | Correct |
| Confirmation of accounts receivables may be omitted in certain circumstances. | Correct |
| Depending upon the circumstances, auditors may confirm total balances due or individual portions of those balances. | Correct |
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sebcat
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