Auditing and Assurance Services, 15e (Arens) Chapter 14 Audit of the Sales and Collection Cycle: Tests Tests of of Controls and Substantive Tests of Transactions
Learning Objective 14-1 1) Which of the following is an account that is not affected by the sales and collection cycle? A) Cash ) Accounts receivable C) Allowance for doubtful accounts !) Accounts "ayable Answer# ! $er%s# $er%s# &ales and collection cycle !iff# 'asy Objective# LO 14-1 AAC&# (eflective thining thining sills sills *) $he auditor+s objectives for the sales and cash co llections activities when the client is "ri%arily an e-co%%erce business as co%"ared to a ,brics and %ortar, business are# A) unchanged ) e."anded C) %itigated !) decreased Answer# A $er%s# $er%s# Auditor objectives for sales sales and cash collections !iff# /oderate Objective# LO 14-1 AAC&# Analytic sills 0) $he overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly "resented in accordance with accounting standards A) $rue ) alse Answer# A $er%s# $er%s# Objective in audit of sales and collection cycle2 Account Account balances fairly "resented !iff# 'asy Objective# LO 14-1 AAC&# (eflective thining thining sills sills
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4) $he sales and collection cycle a""lies to b usinesses that transfer goods to custo%ers or "rovides services to businesses A) $rue ) alse Answer# A $er%s# $er%s# &ales and collection cycle !iff# /oderate Objective# LO 14-1 AAC&# (eflective thining thining sills sills Learning Objective 14-* 1) Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) &ales returns and allowances ) Write-off Write-off of uncollectible accounts C) ad debt e."ense !) 7nterest 7nco%e Answer# ! $er%s# $er%s# Class of transactions2 transactions2 &ales and collection cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills *) What event initiates a transaction in the sales and co llection cycle? A) (ecei"t of cash ) !elivery of "roduct to a custo%er C) 7dentification of a new custo%er !) Custo%er re8uest for goods Answer# ! $er%s# $er%s# 7nitiates transaction transaction in sales and collection cycle cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 0) A 99999999 is a docu%ent that indicates a re8uest for %erchandise by a custo%er A) sales invoice ) vendor invoice C) custo%er order !) sales order Answer# C $er%s# $er%s# !ocu%ent indicates re8uest re8uest for %erchandise %erchandise !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills
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4) A 99999999 is a docu%ent that is %atched with the custo%er order to assure that the correct 8uantity and ty"e of goods are shi""ed A) sales order ) custo%er order C) vendor invoice !) sales invoice Answer# A $er%s# $er%s# !ocu%ent %atched with custo%er order !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills :) What critical event %ust tae "lace before goods can be shi""ed in order o rder to assure "ay%ent can be reasonably e."ected? A) !eter%ination of correct delivery address ) Credit a""roval C) /atching of shi""ing docu%ent with sales invoice !) (ecei"t of sales order fro% the custo%er Answer# $er%s# $er%s# 'vent %ust tae "lace in order to assure "ay%ent "ay%ent !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills ;) efore goods are shi""ed on account6 a "ro"erly authori
) A docu%ent "re"ared to initiate shi"%ent of the goods sold by an inde"endent shi""er is the# A) sales order ) bill of lading C) sales invoice !) custo%er order Answer# $er%s# $er%s# !ocu%ent "re"ared to initiate initiate shi"%ent of goods !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills
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) $he docu%ent used to indicate to the custo%er the a%ount of a sale and "ay%ent due date is the# A) sales invoice ) bill of lading C) "urchase order !) sales order Answer# A $er%s# $er%s# !ocu%ent used to indicate a%ount of sale and "ay%ent due date !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills @) =enerally6 when is the earliest "oint in the sales and collection cycle in which revenue can be recogni
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1*) $he total of the individual account balances b alances in the accounts receivable subsidiary ledger should e8ual the# A) total sales for the "eriod ) balance of the sales account in the general ledger C) total sales less the total cash received for the "eriod !) balance of the accounts receivable account in the general ledger Answer# ! $er%s# $er%s# Accounts receivable receivable subsidiary ledger !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 10) 7n the accounts receivable subsidiary ledger the length of ti%e the account has been due can be useful to the client and the auditor in "re"aring the# A) trial balance ) woring trial balance C) accounts receivable trial balance !) aged accounts receivable trial balance Answer# ! $er%s# $er%s# Accounts receivable receivable subsidiary ledger !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 14) A docu%ent sent to each custo%er showing his or her beginning accounts receivable balance and the a%ount and date of each sale6 cash "ay%ent received6 any debit or credit %e%o issued6 and the ending balance is the# A) accounts receivable subsidiary ledger ) %onthly state%ent C) re%ittance advice !) sales invoice Answer# $er%s# $er%s# !ocu%ent sent to custo%er custo%er showing beginning accounts receivable balance !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 1:) $he docu%ent that acco%"anies the custo%er+s "ay%ent is the# A) credit %e%o ) re%ittance advice C) vendor invoice !) %onthly state%ent Answer# $er%s# $er%s# !ocu%ent that acco%"anies custo%er+s "ay%ent !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills : Co"yright 3 *14 5earson 'ducation6 7nc
1;) $he docu%ent that re8uires adjust%ents to the custo%ers subsidiary ledger accoun t is the# A) bill of lading ) sales invoice C) credit %e%o !) %onthly state%ent Answer# C $er%s# $er%s# !ocu%ent that re8uires adjust%ent adjust%ent to the custo%er+s account !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 1>) A docu%ent that initiates shi"%ent of goods and indicates the descri"tion of the %erchandise6 the 8uantity shi""ed6 and custo%er na%e na %e and address is the# A) bill of lading ) sales invoice C) "icing ticet !) vendor invoice Answer# A $er%s# $er%s# !ocu%ent that initiates initiates shi"%ent of goods !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 1) $he 99999999 is a contract between a carrier eg6 a trucing co%"any) and the seller of goods that dictates the details surrounding the shi"%ent of goods A) bill of lading ) sales invoice C) "icing ticet !) re%ittance advice Answer# A $er%s# $er%s# Contract that dictates details for shi"%ent shi"%ent of goods !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 1@) &o%e co%"anies have custo%ers send "ay%ents directly to an address %aintained by a ban $his is called an) 99999999 syste% A) direct de"osit ) funds transfer C) locbo. !) interban transfer Answer# C $er%s# $er%s# 5ay%ents sent to "ost office bo. !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills
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*) Which of the following is a business function related to sales returns and allowances? A) 5rocessing custo%er orders ) Writing Writing off uncollectible accounts C) 5rocessing and recording credit %e%os !) =ranting credit Answer# C $er%s# $er%s# !esigning audit "rocedures sales sales returns and allowances !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills *1) or a fir% that "ractices good internal controls in the sales and collections cycle6 the function of indicating credit a""roval should be recorded on which of the following docu%ents? A) &ales order ) &ales invoice C) Custo%er order !) (e%ittance advice Answer# A $er%s# $er%s# =ood internal controls in in sales and collection cycle2 Credit Credit a""roval !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills **) When "osting ite%s fro% the sales journal6 details of the journal and journal totals are "osted to which ite%s? A) !etails of of th the jo journal ar are "o "osted to to Bournal to totals ar are "o "osted to to $he sales account $he general ledger ) !etails of of th the jo journal ar are "o "osted to to $he sa sales ac account
Bournal to totals ar are "o "osted to to $he ac accounts re receivable su subsidiary le ledger
!etails of of th the jo journal ar are "o "osted to to $he accounts receivable %aster file
Bournal to totals ar are "o "osted to to $he general ledger
!etails of of th the jo journal ar are "o "osted to to $he accounts receivable account in the general ledger
Bournal to totals ar are "o "osted to to $he sales account in the general ledger
C)
!)
Answer# C $er%s# $er%s# 5osting fro% sales journal2 !etails !etails of journal and journal totals "osted !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills > Co"yright 3 *14 5earson 'ducation6 7nc
*0) Credit %e%os are nor%ally issued to# A) adjust the custo%ers balance to the a%ount owed to the co%"any because of returned goods or an allowance ) assist in the aging of accounts receivable C) reduce custo%er frustration and sales losses !) infor% the custo%er of the balance due Answer# A $er%s# Credit %e%os !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills *4) Who is generally res"onsible for o"ening recei"ts when a co%"any uses a locbo. to s"eed the handling of cash recei"ts? A) Co%"any "ersonnel ) $e%"orary $e%"orary e%"loyees in the town where the locbo. is located C) an e%"loyees !) Co%"any controller Answer# C $er%s# $er%s# O"ening recei"ts2 recei"ts2 Locbo. !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills *:) When "rocessing and recording cash recei"ts6 an i%"ortant fact to consider is# A) the %ost i%"ortant concern is de"ositing cash at least twice daily ) the %ost i%"ortant concern is the "ossibility of theft C) theft can occur only after the recei"ts are entered in the records !) it the custo%er fails to include a re%ittance advice6 the chec should be returned to the custo%er Answer# $er%s# $er%s# 5rocessing and recording recording cash recei"ts !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills *;) &ales should be recorded6 at the earliest6 when# A) the order is received ) the order is received and credit is a""roved C) credit is a""roved and it is verified that there is enough inventory to fill the order !) the shi"%ent taes "lace Answer# ! $er%s# $er%s# &ales recorded !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills Co"yright 3 *14 5earson 'ducation6 7nc
*>) '."lain each of the following ty"es of docu%ents and indicate the class of transactions in which they are co%%only used 1 Cus Custo%er o%er or order der * &hi" &hi""i "ing ng docu docu%e %ent nt 0 (e%i (e%itt ttan ance ce adv advic icee 4 &ales &ales retu returns rns and all allowan owance ce journ journal al : ncolle ncollecti ctible ble account account autho authori< ri
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*@) Custo%er billing is a critical "rocess which auditors %ust understand What are the %ost i%"ortant as"ects of billing and what are the related objectives? Answer# $he %ost i%"ortant i%"ortant as"ects of billing are# H $o %ae %ae sure that that all all shi"%e shi"%ents nts %ade %ade have have been bille billed d co%"let co%"letene eness) ss)66 H $hat no shi"% shi"%ent ent has has been been bille billed d %ore %ore than than once once occur occurren rence) ce)66 and H $hat each each shi"%e shi"%ent nt is billed billed for for the the "ro"e "ro"err a%oun a%ountt accur accuracy acy) ) $er%s# $er%s# As"ects of billing and related objectives !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 0) !iscuss the four business functions that result in sales transactions in a ty"ical sales and collection cycle and6 for each function6 state the ey docu%ents and records involved Answer# $he four business functions functions that result in in sales transactions6 and related related docu%ents and records6 are# H Processing customer orders orders Iey docu%ents include custo%er order and sales order H Granting credit Custo%er order or sales order H Shipping goods goods &hi""ing docu%ent bill of lading) H Billing customers and recording recording sales sales &ales invoice6 sales transaction file6 sales journal or listing6 accounts receivable %aster file6 accounts receivable trial balance6 and %onthly state%ents $er%s# $er%s# usiness functions that result in in sales transactions2 &ales and collection cycle2 !ocu%ents !iff# Challenging Objective# LO 14-* AAC&# Analytic sills
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01) /atch seven of the ter%s for docu%ents and records a-) with the descri"tions "rovided below 1->)# a b c d e f g h i j
Cust Custo% o%er er ord order er for% for% &ales order il ill of ladin ading g &al &ales invoi nvoice ce &u%% &u%%ar ary y sale saless re" re"or ortt Accou Account ntss rece receiv ivab able le %as %aste terr file file /ont /onthl hly y stat state% e%en entt (e%i (e%itt ttan ance ce adv advic icee 5rel 5relis isti ting ng of cash cash rece recei" i"ts ts Credit %e%o ncolle ncollecti ctible ble account account autho authori< ri
99999999 1 A list "re"ared when cash is received by so%eone who has no res"onsibility for recording sales6 accounts receivable6 or cash6 and has no access to the accounting records 7t is used to verify whether cash received was recorded and de"osited at the correct a%ounts and on a ti%ely basis 99999999 * A docu%ent indicating a reduction in the a%ount due fro% a custo%er because of returned goods or an allowance 99999999 0 A docu%ent "re"ared to initiate shi"%ent of goods6 indicating the descri"tion of the %erchandise6 the 8uantity shi""ed6 and other relevant data 7t is a written contract between the carrier and seller of the recei"t and shi"%ent of goods 99999999 4 A docu%ent for co%%unicating the descri"tion6 8uantity6 8uantity6 and related infor%ation for goods ordered by a custo%er $his is fre8uently used to indicate credit a""roval and authori A docu%ent or electronic record indicating the descri"tion and 8uantity of goods sold6 the "rice6 freight charges6 insurance6 ter%s6 and other relevant data
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Answer# 1 i * j 0 c 4 b : h ; > d $er%s# $er%s# !ocu%ents and records !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 0*) A sales invoice is a docu%ent that usually indicates credit a""roval A) $rue ) alse Answer# $er%s# $er%s# &ales invoice2 Credit a""roval !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 00) Credit should be a""roved before a custo%er+s order is received A) $rue ) alse Answer# $er%s# Credit Cr edit a""roved a""rov ed !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 04) Credit should be a""roved before goods are shi""ed to a custo%er A) $rue ) alse Answer# A $er%s# Credit Cr edit a""roved a""rov ed !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills
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0:) $he recei"t of a custo%er order fro% a custo%er is the starting "oint for the entire sales and collection cycle A) $rue ) alse Answer# A $er%s# $er%s# Custo%er order2 &tarting &tarting "oint for sales and collection cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 0;) $he "re"aration of a sales invoice is the final ste" in the sales and collection cycle A) $rue ) alse Answer# $er%s# $er%s# &ales invoice2 inal ste" ste" in sales and collection cycle cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 0>) A bill of lading is a s"ecial ty"e of sales invoice used when goods are shi""ed interstate A) $rue ) alse Answer# $er%s# $er%s# ill of lading2 &ales invoice invoice !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 0) $he shi""ing "oint is critical because it is the first "oint at which co%"any assets are released to another "arty A) $rue ) alse Answer# A $er%s# $er%s# &hi""ing "oint critical2 Assets Assets released !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 0@) A bill of lading is a written contract between the seller and the buyer A) $rue ) alse Answer# $er%s# ill of lading2 Written Written contract !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills
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4) 7n a locbo. syste%6 ban e%"loyees are res"onsible for o"ening cash recei"ts and %aintaining records of all "ay%ents %ade by custo%ers cu sto%ers at the locbo. address A) $rue ) alse Answer# A $er%s# Locbo. Locbo . syste% !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 41) &ales transactions are the result of the following five functions in the sales and collection cycle# "rocessing custo%er orders6 granting credit6 shi""ing goods6 billing custo%ers6 and recording sales A) $rue ) alse Answer# A $er%s# $er%s# &ales and collection cycle !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 4*) $he "relisting of cash recei"ts should be "re"ared by the individual who has "ri%ary res"onsibility for the recording of cash recei"ts A) $rue ) alse Answer# $er%s# $er%s# 5relisting of cash recei"ts !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills 40) A credit %e%o is a docu%ent used internally that indicates authority to write-off an account receivable as uncollectible A) $rue ) alse Answer# $er%s# Credit %e%os !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills
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44) 7f a co%"any uses a "eriodic inventory syste%6 the shi""ing records are used to u"date the inventory 8uantities A) $rue ) alse Answer# $er%s# $er%s# &hi""ing records and inventory records !iff# /oderate Objective# LO 14-* AAC&# Analytic sills 4:) $he sales journal is generated fro% the sales transaction file A) $rue ) alse Answer# A $er%s# $er%s# &ales transaction file file and sales journal !iff# /oderate Objective# LO 14-* AAC&# (eflective thining thining sills sills Learning Objective 14-0 1) When designing audit "rocedures6 tracing of source do cu%ents to the custo%ers subsidiary ledger and subse8uently to the general ledger is done to satisfy what assertion? A) Jaluation ) Cutoff C) Co%"leteness !) Classification Answer# C $er%s# $er%s# $racing $racing of source docu%ents2 Assertion Assertion !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining thining sills sills *) When assessing ris control6 the auditor %ust do all of the following except# A) assess control ris for each objective by evaluating the controls and deficiencies for each objective ) "erfor% the detailed test of balances C) identify the ey internal controls and deficiencies d eficiencies !) associate the ey controls and deficiencies de ficiencies with the objectives Answer# $er%s# Assess control contro l ris !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining thining sills sills
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0) When sales invoices are auto%atically calculated and " osted by a co%"uter6 the auditor %ay be able to reduce substantive tests of transactions for which6 if any6 any6 assertion? A) Accuracy ) '.istence C) Co%"leteness !) Kone of the above Answer# A $er%s# $er%s# (educe substantive tests tests of transactions transactions !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining thining sills sills 4) 7n %any audits6 no substantive tests of transactions are %ade for the 99999999 assertion on the grounds that understate%ent of sales is not a concern A) accuracy ) e.istence C) co%"leteness !) none of the above Answer# C $er%s# $er%s# Ko substantive tests of transactions2 Assertion2 Assertion2 understate%ent of sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills :) Which one the following "rocedures "erfor%ed for the billing function "rovides evidence for the co%"leteness assertion? A) /aing sure that all shi"%ents have been billed ) /aing sure that no shi"%ent has been billed %ore than twice C) /aing sure that each shi"%ent is billed at the correct a%ount !) /aing sure that each shi"%ent is billed to the "ro"er custo%er Answer# A $er%s# $er%s# 5rocedures2 illing function2 function2 Co%"leteness assertion assertion !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills ;) When assessing "lanned control ris for sales# A) the ey internal controls and deficiencies for sales will be the sa%e for every co%"any ) the audit objectives for sales will differ fro% co%"any to co%"any C) a flowchart is re8uired to hel" assess control ris for sales !) assessing control ris for sales is a highly subjective decision Answer# ! $er%s# Access control contro l ris !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills
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>) $he docu%ent that the accounting staff will use as the "ri%ary basis for recording sales transactions and u"dating the custo%ers accounts receivable subsidiary ledger is the# A) sales order ) bill of lading C) sales journal !) sales invoice Answer# ! $er%s# $er%s# !ocu%ent used as "ri%ary basis for recording sales transactions transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills ) 7n deter%ining the level of audit efficiency e fficiency66 once the auditor has identified the ey internal controls and identified any deficiencies in order to deter%ine the level of control ris a""ro"riate for a "rivate co%"any client6 it is a""ro"riate to decide whether# A) substantive tests can be reduced sufficiently to justify costs of "erfor%ing tests of controls ) substantive tests can be increased sufficiently to justify costs of "erfor%ing tests of controls C) tests of controls can be increased sufficiently to justify costs of "erfor%ing substantive tests !) tests of controls can be reduced sufficiently to justify costs of "erfor%ing substantive tests Answer# A $er%s# $er%s# Audit efficiency efficiency and internal controls !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining thining sills sills @) Which one of the following state%ents is true? 7n deciding on substantive tests of transactions# A) so%e "rocedures are co%%only e%"loyed on every audit regardless of the circu%stances ) all "rocedures are de"endent on the ade8uacy of the controls and the results of the tests of controls C) results obtained in the "rior year+s audit will not affect the "rocedures used this year !) the %ateriality of the ite% will not influence the choice of "rocedures used Answer# A $er%s# $er%s# &ubstantive tests of transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1) $o test test for recorded sales for which there were no actual shi"%ents6 the auditor vouches fro% the# A) bill of lading to the sales journal ) sales journal to the shi""ing docu%ents C) sales journal to the accounts receivable subsidiary ledger !) bill of lading to the su""orting custo%er order and sales order Answer# $er%s# $er%s# $est $est for recorded sales with no actual shi"%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1> Co"yright 3 *14 5earson 'ducation6 7nc
11) An An effective "rocedure to test for unbilled shi"%ents is to trace fro% the# A) sales journal to the shi""ing docu%ents ) shi""ing docu%ents to the sales journal C) sales journal to the accounts receivable ledger !) sales journal to the general ledger sales account Answer# $er%s# $er%s# 5rocedure for unbilled shi"%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1*) $he auditor traces ite%s fro% the source docu%ents to the journals in order to accu%ulate audit evidence that will satisfy the# A) e.istence objective ) co%"leteness objective C) ownershi" objective !) valuation objective Answer# $er%s# $er%s# $race ite%s ite%s fro% source docu%ents to journals !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 10) 7n %any audits of sales transactions substantive tests of transactions can be reduced in deter%ining the co%"leteness objective because# A) understate%ents of assets and inco%e are a greater concern than overstate%ents ) overstate%ents of assets and inco%e are a greater concern than understate%ents C) it doesn+t %atter if inco%e is understated because the savings on inco%e ta. offsets the reduced revenue and net inco%e is correct !) the unrecorded sales cause a reduction of accounts receivable2 therefore6 the ratios of the two financial state%ents will not be %isleading Answer# $er%s# $er%s# Audit of sales transactions2 &ubstantive tests of transactions2 Co%"leteness objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills
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14) $o deter%ine deter%ine that sales are accurately recorded6 the unit "rices on the du"licate sales invoices are nor%ally co%"ared with# A) the original invoices ) an a""roved %aster "rice list C) the a%ounts recorded in the sales journal jou rnal for that transaction !) the a%ounts "osted to the custo%er+s account in the accounts receivable %aster file Answer# $er%s# $er%s# &ales accurately recorded2 nit "rices co%"ared with !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1:) 5renu%bered docu%ents are intended to hel"# A) 5revent the failure to bill or 5revent du"licate billings or record sales recordings of sales Ees Ees ) 5revent the failure to bill or 5revent du"licate billings or record sales recordings of sales Ko Ko C) 5revent the failure to bill or 5revent du"licate billings or record sales recordings of sales Ees Ko !) 5revent the failure to bill or 5revent du"licate billings or record sales recordings of sales Ko Ees Ees Answer# A $er%s# $er%s# 5renu%bered docu%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills
1@ Co"yright 3 *14 5earson 'ducation6 7nc
1;) 5renu%bered docu%ents will only be useful for control "ur"oses if# A) a different nu%erical se8uence is used for each co%"any ) the se8uence is accounted for "eriodically C) e%"loyees are allowed to use docu%ents out of nu%erical se8uence !) the sa%e nu%erical se8uence is used each accounting "eriod Answer# $er%s# $er%s# 5renu%bered docu%ents2 Control "ur"oses !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1>) 99999999 tests are for o%itted transactions6 while 9999999 9 tests are for none.istent transactions A) $racing6 vouching ) Jouching6 tracing C) Jerifying6 tracing !) $racing6 verifying Answer# A $er%s# $er%s# $ests $ests for o%itted transactions and none.istent transactions transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 1) Which one of the following best describes the au ditors res"onsibilities regarding a""ro"riate authori
* Co"yright 3 *14 5earson 'ducation6 7nc
*) An auditor needs to deter%ine whether all custo%ers of an electric utility co%"any are being billed $he auditor should test fro% the# A) sales register to the accounts receivable ledger ) sales register to the %eter de"art%ent records C) accounts receivable ledger to the sales register !) %eter de"art%ent records to the sales register Answer# ! $er%s# All custo%ers custo%e rs being billed !iff# Challenging Objective# LO 14-0 AAC&# Analytic sills *1) Which one of the following would the auditor consider to be an inco%"atible o"eration if the cashier receives re%ittances fro% the %ailroo%? A) $he cashier "re"ares the daily de"osit ) $he cashier %aes the daily de"osit at a local ban C) $he cashier "osts the recei"ts to the accounts receivable subsidiary ledger cards !) $he cashier endorses the checs Answer# C $er%s# $er%s# 7nco%"atible o"eration if cashier cashier receives re%ittance2 &e"aration of duties !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining thining sills sills **) Which of the following is the a""ro"riate "oint at which the auditor dee%s authori
5rice authori
&hi"%ent of goods Ees
Credit granting Ko
5rice authori
&hi"%ent of goods Ko
Credit granting Ees
5rice authori
&hi"%ent of goods Ko
C)
!)
Answer# A $er%s# $er%s# 5oint authori
*0) Which of the following would least concern an auditor regarding the lac of a s"ecific authori
** Co"yright 3 *14 5earson 'ducation6 7nc
*;) When assessing "lanned control ris for sales6 the auditor is concerned about "ro"er authori) &e"aration of duties in the salesGcollection cycle should %andate that the credit-granting function be se"arate fro% the sales function A) $rue ) alse Answer# A $er%s# $er%s# &e"aration of duties in the salesGcollection salesGcollection cycle2 credit-granting function !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining thining sills sills *) $racing fro% source docu%ents to the journal is is useful for testing the e.istence objective A) $rue ) alse Answer# $er%s# $er%s# $racing2 $racing2 '.istence objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills *@) 7n converting fro% a design for%at audit "rogra% to a "erfor%ance for%at audit "rogra%6 "rocedures are co%bined A) $rue ) alse Answer# $er%s# $er%s# !esign and "erfor%ance "erfor%ance for%at audit "rocedures !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 0) /anage%ent+s assertions for sales and collection activities re%ain the sa%e whether sales are generated through traditional or e-co%%erce activities A) $rue ) alse Answer# A $er%s# $er%s# /anage%ent+s assertions for sales and collection activities activities !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills *0 Co"yright 3 *14 5earson 'ducation6 7nc
01) /isstate%ents involving the co%"leteness objective for sales lead to overstate%ents of assets and inco%e A) $rue ) alse Answer# $er%s# $er%s# /isstate%ents involving involving the co%"leteness objective for sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 0*) Jiolations Jiolations of the e.istence objective for sales are o f greater concern to the auditor than violations of the co%"leteness objective A) $rue ) alse Answer# A $er%s# $er%s# Jiolations Jiolations of the e.istence objective for sales2 violations violations of the co%"leteness objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 00) An effective effective "rocedure to test the e.istence e. istence objective for sales is to vouch sales journal entries to co"ies of sales orders6 shi""ing docu%ents6 and sales invoices A) $rue ) alse Answer# A $er%s# $er%s# 5rocedure to test the e.istence e.istence objective for sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 04) or each significant internal control deficiency identified by the auditor6 he or she should design one or %ore tests of controls to assess the e.tent of the deficiency and its effect on the financial state%ents A) $rue ) alse Answer# A $er%s# $er%s# &ignificant internal control deficiency2 $ests $ests of controls controls !iff# Challenging Objective# LO 14-0 AAC&# Analytic sills
*4 Co"yright 3 *14 5earson 'ducation6 7nc
0:) $he a""ro"riate test of controls for se"aration of duties are ordinarily restricted to the auditor+s observations of activities and discussions with "ersonnel A) $rue ) alse Answer# A $er%s# $est $est of controls contro ls for se"aration se"ara tion of duties !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining thining sills sills 0;) &ales should be billed and recorded as soon as "ossible after the shi"%ent taes "lace A) $rue ) alse Answer# A $er%s# $er%s# 7nternal control !iff# /oderate Objective# LO 14*6 1406 and 14: AAC&# (eflective thining thining sills sills Learning Objective 14-4 1) $ransaction-related audit objectives are essentially the sa%e for "rocessing credit %e%os as for sales with certain differences Which of the following are two ey differences? A) (is and e%"hasis on the co%"leteness objective o bjective ) /ateriality and e%"hasis on the accuracy objective C) (is and e%"hasis on the classification objective !) /ateriality and e%"hasis on the occurrence objective Answer# ! $er%s# $er%s# $ransaction-related $ransaction-related audit objectives2 Credit %e%os !iff# Challenging Objective# LO 14-4 AAC&# (eflective thining thining sills sills *) &%ith /anufacturing Co%"any+s accounts receivable cler has a friend who is also a &%ith+s custo%er $he accounts receivable cler has issued fictitious credit %e%os to his friend for goods su""osedly returned $he %ost effective "rocedure for "reventing this activity is to# A) "renu%ber and account for all credit %e%orandu%s ) re8uire receiving re"orts that "rovide evidence of returned inventory ite%s to su""ort all credit %e%orandu%s before they are a""roved C) have inde"endent sales and accounts receivable de"art%ents !) %ail %onthly state%ents to custo%ers Answer# $er%s# $er%s# ictitious credit %e%os2 %e%os2 5rocedure to "revent activity !iff# /oderate Objective# LO 14-4 AAC&# Analytic sills
*: Co"yright 3 *14 5earson 'ducation6 7nc
0) $he transaction-related audit objectives and the client+s %ethods of controlling %isstate%ents are essentially the sa%e for credit %e%os as for sales with the e.ce" tion of two differences What are the two differences fro% the auditor+s "ers"ective? Answer# $he first difference difference is %ateriality %ateriality 7n %any instances6 sales returns and allowances are so i%%aterial that auditors ignore the% $he second difference is the e%"hasis on the occurrence objective or sales returns and allowances6 auditors usually e%"hasi
*; Co"yright 3 *14 5earson 'ducation6 7nc
Learning Objective 14-: 1) When an e%"loyee who is authori
*> Co"yright 3 *14 5earson 'ducation6 7nc
0) $o "revent fraud6 %anage%ent should deny cash access to anyone res"onsible for# A) O"ening %ail fro% 'ntering sales 'ntering cash recei"ts custo%ers transactions transactions Ees Ees Ees ) O"ening %ail fro% custo%ers Ko
'ntering sales transactions Ko
'ntering cash recei"ts transactions Ees Ees
O"ening %ail fro% custo%ers Ko
'ntering sales transactions Ees Ees
'ntering cash recei"ts transactions Ees Ees
O"ening %ail fro% custo%ers Ees
'ntering sales transactions Ko
'ntering cash recei"ts transactions Ko
C)
!)
Answer# C $er%s# $er%s# raud2 Cash access !iff# /oderate Objective# LO 14*6 1406 and 14: AAC&# (eflective thining thining sills sills 4) $he audit "rocedure referred to as "roof of cash recei"ts is "articularly useful to test# A) ti%e lags in %aing de"osits ) whether all recorded cash recei"ts have been de"osited in the ban C) whether there are cash recei"ts that have not been recorded in the journals !) the client+s reconciliation between cash recei"ts and ban de"osits Answer# $er%s# $er%s# Audit "rocedure2 5roof 5roof of cash recei"ts !iff# /oderate Objective# LO 14-: AAC&# Analytic sills
* Co"yright 3 *14 5earson 'ducation6 7nc
:) Which of the following test of controls is useful to test the co%"leteness objective for cash recei"ts? A) Co%"are shi""ing docu%ents with sales records ) Observe endorse%ent of inco%ing checs C) '.a%ine evidence that the receivable %aster file is reconciled to the general ledger !) Observe if the client reconciles the ban account Answer# $er%s# $er%s# Audit "rocedures2 $est $est co%"leteness objective assertion) for cash recei"ts !iff# /oderate Objective# LO 14-: AAC&# (eflective thining thining sills sills ;) When designing tests of controls and substantive tests of transactions for cash recei"ts6 it is i%"ortant to re%e%ber that# A) the test of controls are designed to test for %onetary %isstate%ents ) auditors use the sa%e %ethodology for designing tests of controls and substantive tests of transactions for cash recei"ts as they use for sales C) the tests of controls are not de"endent on the controls the auditor identifies !) the tests of controls is not de"endent on whether the co%"any being audited is "ublicly tradedG Answer# $er%s# $er%s# !esigning tests of controls and substantive substantive tests of transactions for cash recei"ts !iff# /oderate Objective# LO 14-: AAC&# (eflective thining thining sills sills >) Cash recei"ts fro% sales on account have hav e been %isa""ro"riated Which of the following acts would conceal this fraud and be least liely to be detected by an auditor? A) nderstating the sales journal by not recording cash sales ) Overstating the accounts receivable control account by intentionally %isstating "rices charged for goods sold C) Overstating the accounts receivable subsidiary ledger by n ot recording "ay%ents %ade by custo%ers !) nderstating the cash recei"ts journal by "ur"osely recording incorrect a%ounts Answer# A $er%s# $er%s# Cash recei"ts fro% sales on account2 /isa""ro"riated2 /isa""ro"riated2 raud !iff# Challenging Objective# LO 14-: AAC&# (eflective thining thining sills sills
*@ Co"yright 3 *14 5earson 'ducation6 7nc
) Which of the following would offer the best "rotection for a co%"any that wishes to "revent a reoccurrence of a "reviously detected ,la""ing, , la""ing, "roble% with trade accounts receivable? A) &egregate duties so that the booee"er in charge of the general ledger has no access to inco%ing %ail ) &egregate duties so that no e%"loyee e %"loyee has access to both checs fro% custo%ers and currency fro% daily cash recei"ts C) Mave custo%ers send "ay%ents directly to the co %"any+s de"ository ban !) (e8uest that custo%er+s "ay%ent checs be %ade "ayable to the co%"any and addressed to the treasurer Answer# C $er%s# $er%s# 5revent la""ing "roble% !iff# Challenging Objective# LO 14-: AAC&# (eflective thining thining sills sills @) 5re"aration of a "roof of cash would not be useful in discovering differences d ifferences between the actual and re"orted cash balances if the differences were due to# A) de"osits in transit ) collections on the co%"any+s behalf by the ban which are de"osited directly to the co%"any+s account C) cash recei"ts that were not recorded in the relevant accounting records !) service charges Answer# C $er%s# 5roof of cash !iff# Challenging Objective# LO 14-: AAC&# Analytic sills 1) $he co%"leteness transaction-related audit objective %ust be considered when deter%ining ey controls for for sales List three ey controls that %ust be considered when cash received is recorded in the cash recei"ts journal Answer# 1) is a "relisting of cash recei"ts "re"ared6 *) are checs restrictively endorsed 0) are the batch totals of cash recei"ts co%"ared with the co%"uter su%%ary or other a""licable re"orts6 and 4) are state%ents sent to custo%ers each %onth $er%s# $er%s# Co%"leteness assertion assertion for cash recei"ts and e.isting e.isting controls !iff# /oderate Objective# LO 14-: AAC&# (eflective thining thining sills sills
0 Co"yright 3 *14 5earson 'ducation6 7nc
11) '."lain what la""ing %eans6 and discuss the internal control deficiency that allows it to occur Also Also discuss the "rocedures the auditor can "erfor% to detect la""ing Answer# La""ing6 which is a co%%on co%%on ty"e of e%be<
01 Co"yright 3 *14 5earson 'ducation6 7nc
10) 7n "lanning the audit6 an a n auditor taes 0 basic ste"s in deter%ining the audit "rocedures to be "erfor%ed for any business cycle or class of transactions transactions in order to gather audit evidence concerning "ossible %isstate%ent due to error or fraud List those three b asic ste"s below Answer# $he three basic ste"s in designing tests of controls and substantive tests of transactions are# H !eter% !eter%ine ine ey ey inter internal nal cont control rolss for each each audit audit object objective ive H !esign tests tests of controls controls for for each each control control used used to to su""ort su""ort a reduced reduced control control ris ris H !esign substantiv substantivee tests tests of transact transactions ions to to test for for %onetary %onetary %isst %isstate%en ate%ents ts for each objecti objective ve $er%s# $er%s# Audit "rocedures "erfor%ed for business business cycle or class of transactions !iff# Challenging Objective# LO 14-: AAC&# (eflective thining thining sills sills 14) $he %ost difficult ty"e of cash e%be<
*) $he esti%ation of bad debts e."ense relates to the write-off of uncollectible accounts A) $rue ) alse Answer# A $er%s# $er%s# Audit test for write-off write-off of uncollectible uncollectible accounts !iff# 'asy Objective# LO 14-; AAC&# (eflective thining thining sills sills 0) $here should generally be corres"ondence in the client+s file establishing the uncollectibility of their account A) $rue ) alse Answer# A $er%s# $er%s# Audit test for write-off write-off of uncollectible uncollectible accounts !iff# 'asy Objective# LO 14-; AAC&# (eflective thining thining sills sills
00 Co"yright 3 *14 5earson 'ducation6 7nc
