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 !) 3nterest 3nco%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) 3dentification of a new custo%er !) Custo%er reuest for goods Answer# ! $er%s# $er%s# 3nitiates transaction transaction in sales and collection cycle cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills 0) A 55555555 is a docu%ent that indicates a reuest 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 reuest reuest for %erchandise %erchandise !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills
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4) A 55555555 is a docu%ent that is %atched with the custo%er order to assure that the correct uantity 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 6) 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 7) efore goods are shi""ed on account8 a "ro"erly authori9ed "erson %ust# A) "re"are the sales invoice ) a""rove the journal entry C) a""rove the custo%er+s credit !) verify that the unit "rice is accurate Answer# C $er%s# $er%s# :oods shi""ed on account2 ;ro"erly authori9ed "erson !iff# 'asy Objective# LO 14-* AAC&# (eflective thining thining sills sills <) 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# !ocu%ent used to indicate a%ount of sale and "ay%ent due date !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills >) :enerally8 when is the earliest "oint in the sales and collection cycle in which revenue can be recogni9ed? A) When the sale is a""roved ) When the credit a""roval "rocess is finali9ed C) When the cash is collected !) When the goods have been shi""ed Answer# ! $er%s# &ales and collection cycle2 revenue recogni9ed !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 1) /ost co%"anies recogni9e sales revenue when# A) sales are invoiced ) "ay%ent is received fro% the custo%er C) goods are shi""ed !) the custo%er+s order is received Answer# C $er%s# (ecogni9e sales revenue !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 11) Which of the following is not a business function within the ,&ales, class of transactions? A) ;rocessing custo%er orders ) :ranting credit C) ;rocessing and recording sales returns and allowances !) &hi""ing goods Answer# C $er%s# usiness function within the sales class of transactions !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills
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1*) $he total of the individual account balances in the accounts receivable subsidiary ledger should eual 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# Accounts receivable subsidiary ledger !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 10) 3n 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# Accounts receivable subsidiary ledger !iff# 'asy Objective# LO 14-* AAC&# (eflective thining 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 sale8 cash "ay%ent received8 any debit or credit %e%o issued8 and the ending balance is the# A) accounts receivable subsidiary ledger ) %onthly state%ent C) re%ittance advice !) sales invoice Answer# $er%s# !ocu%ent sent to custo%er showing beginning accounts receivable balance !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 16) $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# !ocu%ent that acco%"anies custo%er+s "ay%ent !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 6
17) $he docu%ent that reuires 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# !ocu%ent that reuires adjust%ent to the custo%er+s account !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 1<) A docu%ent that initiates shi"%ent of goods and indicates the descri"tion of the %erchandise8 the uantity shi""ed8 and custo%er na%e and address is the# A) bill of lading ) sales invoice C) "icing ticet !) vendor invoice Answer# A $er%s# !ocu%ent that initiates shi"%ent of goods !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 1=) $he 55555555 is a contract between a carrier @eg8 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# Contract that dictates details for shi"%ent of goods !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 1>) &o%e co%"anies have custo%ers send "ay%ents directly to an address %aintained by a ban $his is called a@n) 55555555 syste% A) direct de"osit ) funds transfer C) locbo. !) interban transfer Answer# C $er%s# ;ay%ents sent to "ost office bo. !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills
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*) Which of the following is a business function related to sales returns and allowances? A) ;rocessing custo%er orders ) Writing off uncollectible accounts C) ;rocessing and recording credit %e%os !) :ranting credit Answer# C $er%s# !esigning audit "rocedures sales returns and allowances !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills *1) or a fir% that "ractices good internal controls in the sales and collections cycle8 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# :ood internal controls in sales and collection cycle2 Credit a""roval !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills **) When "osting ite%s fro% the sales journal8 details of the journal and journal totals are "osted to which ite%s? A) !etails of the journal are "osted to ournal totals are "osted to $he sales account $he general ledger ) !etails of the journal are "osted to $he sales account
ournal totals are "osted to $he accounts receivable subsidiary ledger
!etails of the journal are "osted to $he accounts receivable %aster file
ournal totals are "osted to $he general ledger
!etails of the journal are "osted to $he accounts receivable account in the general ledger
ournal totals are "osted to $he sales account in the general ledger
C)
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Answer# C $er%s# ;osting fro% sales journal2 !etails of journal and journal totals "osted !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills <
*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 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%"loyees in the town where the locbo. is located C) an e%"loyees !) Co%"any controller Answer# C $er%s# O"ening recei"ts2 Locbo. !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills *6) When "rocessing and recording cash recei"ts8 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 advice8 the chec should be returned to the custo%er Answer# $er%s# ;rocessing and recording cash recei"ts !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills *7) &ales should be recorded8 at the earliest8 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# &ales recorded !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills =
*<) '."lain each of the following ty"es of docu%ents and indicate the class of transactions in which they are co%%only used 1 Custo%er order * &hi""ing docu%ent 0 (e%ittance advice 4 &ales returns and allowance journal 6 Bncollectible account authori9ation for% Answer# 1 Custo%er order reuest for %erchandise by a custo%er A""ears in the sales class of transactions * &hi""ing docu%ent docu%ent "re"ared to initiate shi"%ent of goods8 indicating the descri"tion of the %erchandise8 the uantity shi""ed8 an d other relevant data A""ears in the sales class of transactions 0 (e%ittance advice docu%ent that is %ailed to the custo%er and ty"ically returned to the seller with "ay%ent A""ears in the cash recei"ts class of transactions 4 &ales returns and allowance journal journal used to record all sales returns and allowances 3t "erfor%s the sa%e function as the sales journal A""ears in the sales returns and allowance class of transactions 6 Bncollectible account authori9ation for% docu%ent used internally to indicate authority to write off an account receivable A""ears in the charge off of uncollectible accounts class of transactions $er%s# !ocu%ents and class of transactions !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills *=) Dou are an audit %anager for (odgers E Co and have recently taen on a new client8 /anufacturing Co%"any Dou are in the initial stages of "lanning the audit and have decided to start gathering infor%ation about the salesFcollection cycle of the business List below the classes of transactions that you need to gather audit evidence for in designing your audit "rocedures Answer# $he five classes of transactions that co%"rise the sales and collection cycle are# G &ales G Cash recei"ts G &ales returns and allowances G Write-off of uncollectible accounts G ad debt e."ense $er%s# Classes of transactions that co%"rise the sales and collection cycle !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills
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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 as"ects of billing are# G $o %ae sure that all shi"%ents %ade have been billed @co%"leteness)8 G $hat no shi"%ent has been billed %ore than once @occurrence)8 and G $hat each shi"%ent is billed for the "ro"er a%ount @accuracy) $er%s# As"ects of billing and related objectives !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills 0) !iscuss the four business functions that result in sales transactions in a ty"ical sales and collection cycle and8 for each function8 state the ey docu%ents and records involved Answer# $he four business functions that result in sales transactions8 and related docu%ents and records8 are# G Processing customer orders Hey docu%ents include custo%er order and sales order G Granting credit Custo%er order or sales order G Shipping goods &hi""ing docu%ent @bill of lading) G Billing customers and recording sales &ales invoice8 sales transaction file8 sales journal or listing8 accounts receivable %aster file8 accounts receivable trial balance8 and %onthly state%ents $er%s# usiness functions that result 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
Custo%er order for% &ales order ill of lading &ales invoice &u%%ary sales re"ort Accounts receivable %aster file /onthly state%ent (e%ittance advice ;relisting of cash recei"ts Credit %e%o Bncollectible account authori9ation for%
55555555 1 A list "re"ared when cash is received by so%eone who has no res"onsibility for recording sales8 accounts receivable8 or cash8 and has no access to the accounting records 3t is used to verify whether cash received was recorded and de"osited at the correct a%ounts and on a ti%ely basis 55555555 * A docu%ent indicating a reduction in the a%ount due fro% a custo%er because of returned goods or an allowance 55555555 0 A docu%ent "re"ared to initiate shi"%ent of goods8 indicating the descri"tion of the %erchandise8 the uantity shi""ed8 and other relevant data 3t is a written contract between the carrier and seller of the recei"t and shi"%ent of goods 55555555 4 A docu%ent for co%%unicating the descri"tion8 uantity8 and related infor%ation for goods ordered by a custo%er $his is freuently used to indicate credit a""roval and authori9ation for shi"%ent 55555555 6 A docu%ent %ailed to the custo%er and ty"ically returned to the seller with the cash "ay%ent 55555555 7 A docu%ent used internally to indicate authority to write-off an account receivable as uncollectible 55555555 < A docu%ent or electronic record indicating the descri"tion and uantity of goods sold8 the "rice8 freight charges8 insurance8 ter%s8 and other relevant data
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Answer# 1 i * j 0 c 4 b 6 h 7 < d $er%s# !ocu%ents and records !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills 0*) A sales invoice is a docu%ent that usually indicates credit a""roval A) $rue ) alse Answer# $er%s# &ales invoice2 Credit a""roval !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 00) Credit should be a""roved before a custo%er+s order is received A) $rue ) alse Answer# $er%s# Credit a""roved !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 04) Credit should be a""roved before goods are shi""ed to a custo%er A) $rue ) alse Answer# A $er%s# Credit a""roved !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills
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06) $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# Custo%er order2 &tarting "oint for sales and collection cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining sills 07) $he "re"aration of a sales invoice is the final ste" in the sales and collection cycle A) $rue ) alse Answer# $er%s# &ales invoice2 inal ste" in sales and collection cycle !iff# 'asy Objective# LO 14-* AAC&# (eflective thining 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# ill of lading2 &ales invoice !iff# 'asy Objective# LO 14-* AAC&# (eflective thining 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# &hi""ing "oint critical2 Assets released !iff# /oderate Objective# LO 14-* AAC&# (eflective thining 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 contract !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills
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4) 3n a locbo. syste%8 ban e%"loyees are res"onsible for o"ening cash recei"ts and %aintaining records of all "ay%ents %ade by custo%ers at the locbo. address A) $rue ) alse Answer# A $er%s# Locbo. syste% !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills 41) &ales transactions are the result of the following five functions in the sales and collection cycle# "rocessing custo%er orders8 granting credit8 shi""ing goods8 billing custo%ers8 and recording sales A) $rue ) alse Answer# A $er%s# &ales and collection cycle !iff# /oderate Objective# LO 14-* AAC&# (eflective thining 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# ;relisting of cash recei"ts !iff# /oderate Objective# LO 14-* AAC&# (eflective thining 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 sills
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44) 3f a co%"any uses a "eriodic inventory syste%8 the shi""ing records are used to u"date the inventory uantities A) $rue ) alse Answer# $er%s# &hi""ing records and inventory records !iff# /oderate Objective# LO 14-* AAC&# Analytic sills 46) $he sales journal is generated fro% the sales transaction file A) $rue ) alse Answer# A $er%s# &ales transaction file and sales journal !iff# /oderate Objective# LO 14-* AAC&# (eflective thining sills Learning Objective 14-0 1) When designing audit "rocedures8 tracing of source do cu%ents to the custo%ers subsidiary ledger and subseuently to the general ledger is done to satisfy what assertion? A) Ialuation ) Cutoff C) Co%"leteness !) Classification Answer# C $er%s# $racing of source docu%ents2 Assertion !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining sills *) When assessing ris control8 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 !) associate the ey controls and deficiencies with the objectives Answer# $er%s# Assess control ris !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining sills
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0) When sales invoices are auto%atically calculated and " osted by a co%"uter8 the auditor %ay be able to reduce substantive tests of transactions for which8 if any8 assertion? A) Accuracy ) '.istence C) Co%"leteness !) Jone of the above Answer# A $er%s# (educe substantive tests of transactions !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining sills 4) 3n %any audits8 no substantive tests of transactions are %ade for the 55555555 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# Jo substantive tests of transactions2 Assertion2 understate%ent of sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 6) 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# ;rocedures2 illing function2 Co%"leteness assertion !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 7) 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 reuired to hel" assess control ris for sales !) assessing control ris for sales is a highly subjective decision Answer# ! $er%s# Access control ris !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining 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# !ocu%ent used as "ri%ary basis for recording sales transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills =) 3n deter%ining the level of audit efficiency8 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 client8 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# Audit efficiency and internal controls !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills >) Which one of the following state%ents is true? 3n 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 adeuacy 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# &ubstantive tests of transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 1) $o test for recorded sales for which there were no actual shi"%ents8 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# $est for recorded sales with no actual shi"%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 1<
11) 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# ;rocedure for unbilled shi"%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining 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# $race ite%s fro% source docu%ents to journals !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 10) 3n %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 therefore8 the ratios of the two financial state%ents will not be %isleading Answer# $er%s# Audit of sales transactions2 &ubstantive tests of transactions2 Co%"leteness objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills
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14) $o deter%ine that sales are accurately recorded8 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 for that transaction !) the a%ounts "osted to the custo%er+s account in the accounts receivable %aster file Answer# $er%s# &ales accurately recorded2 Bnit "rices co%"ared with !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 16) ;renu%bered docu%ents are intended to hel"# A) ;revent the failure to bill or ;revent du"licate billings or record sales recordings of sales Des Des ) ;revent the failure to bill or ;revent du"licate billings or record sales recordings of sales Jo Jo C) ;revent the failure to bill or ;revent du"licate billings or record sales recordings of sales Des Jo !) ;revent the failure to bill or ;revent du"licate billings or record sales recordings of sales Jo Des Answer# A $er%s# ;renu%bered docu%ents !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills
1>
17) ;renu%bered docu%ents will only be useful for control "ur"oses if# A) a different nu%erical seuence is used for each co%"any ) the seuence is accounted for "eriodically C) e%"loyees are allowed to use docu%ents out of nu%erical seuence !) the sa%e nu%erical seuence is used each accounting "eriod Answer# $er%s# ;renu%bered docu%ents2 Control "ur"oses !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 1<) 55555555 tests are for o%itted transactions8 while 5555555 5 tests are for none.istent transactions A) $racing8 vouching ) Iouching8 tracing C) Ierifying8 tracing !) $racing8 verifying Answer# A $er%s# $ests for o%itted transactions and none.istent transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 1=) Which one of the following best describes the au ditors res"onsibilities regarding a""ro"riate authori9ations in the salesFcollections cycle? A) 8 C8 and ! should all be of concern to the auditor ) Credit %ust be authori9ed before the sale C) :oods %ust be shi""ed after the authori9ation !) ;rices %ust be authori9ed Answer# A $er%s# Authori9ations in salesFcollection cycle !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills 1>) Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the salesFcollection cycle? A) &ales being included in the journal for which no shi"%ent was %ade ) &ales to related "arties8 such as officers and subsidiaries C) &ales recorded %ore than once !) &hi"%ents being %ade to none.istent custo%ers and recorded as sales Answer# $er%s# &ubstantive tests of transactions for salesFcollection cycle !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills
*
*) 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 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# 3nco%"atible o"eration if cashier receives re%ittance2 &e"aration of duties !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills **) Which of the following is the a""ro"riate "oint at which the auditor dee%s authori9ation to be critical? A) Credit granting ;rice authori9ation &hi"%ent of goods Des Des Des ) Credit granting Des
;rice authori9ation Jo
&hi"%ent of goods Des
Credit granting Jo
;rice authori9ation Des
&hi"%ent of goods Jo
Credit granting Des
;rice authori9ation Jo
&hi"%ent of goods Jo
C)
!)
Answer# A $er%s# ;oint authori9ation dee%ed critical !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills *1
*0) Which of the following would least concern an auditor regarding the lac of a s"ecific authori9ation to conduct the sales transaction? A) :ranting of credit ) &hi"%ent of goods C) !eter%ination of discounts !) &elling of goods for cash Answer# ! $er%s# &"ecific authori9ation to conduct sales transactions !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills *4) 3n designing substantive audit "rocedures for tests of transactions for sales the auditor n eeds to test for evidence of %isstate%ents due to errors or fraud !escribe at least * "otential errors @unintentional) and at least 1 intentional @fraud) Answer# 1 BnintentionalKsales included in the journals for which no shi"%ent was %ade and sales that were recorded %ore than once * 3ntentional @fraud)Kshi"%ents %ade to none.istent custo%ers and were recorded as sales $er%s# &ubstantive audit "rocedures for tests of transactions for sales2 /isstate%ents2 raud !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills *6) or each of the following "otential %isstate%ents8 "rovide one "otential audit test that could be used to detect the %isstate%ent G &ales included in the journals for which there was no shi"%ent G &ale recorded %ore than once G &hi"%ents %ade to none.istent custo%ers and recorded as sales Answer# $he "otential audit tests include the following# G Sales included in the journals for which there was no shipment Iouch selected entries in the sales journal to related co"ies of shi""ing and other su""orting docu%ents G Sale recorded more than once (eview a nu%erically sorted list of recorded sales transactions for du"licate nu%bers $he auditor can also test for "ro"er c ancellation of shi""ing docu%ents G Shipments made to nonexistent customers and recorded as sales $race custo%er infor%ation on sales invoices to the custo%er %aster file $er%s# Audit test used to detect %isstate%ent !iff# Challenging Objective# LO 14-0 AAC&# (eflective thining sills
**
*7) When assessing "lanned control ris for sales8 the auditor is concerned about "ro"er authori9ation at three ey "oints !iscuss each of these three "oints Answer# Credit %ust be "ro"erly authori9ed before a sale taes "lace2 goods should be shi""ed only after "ro"er authori9ation2 and "rices including ba se ter%s8 freight8 and discounts %ust be "ro"erly authori9ed $er%s# Assessing "lanned control ris2 ;ro"er authori9ation !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills *<) &e"aration of duties in the salesFcollection cycle should %andate that the credit-granting function be se"arate fro% the sales function A) $rue ) alse Answer# A $er%s# &e"aration of duties in the salesFcollection cycle2 credit-granting function !iff# 'asy Objective# LO 14-0 AAC&# (eflective thining sills *=) $racing fro% source docu%ents to the journal is useful for testing the e.istence objective A) $rue ) alse Answer# $er%s# $racing2 '.istence objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills *>) 3n converting fro% a design for%at audit "rogra% to a "erfor%ance for%at audit "rogra%8 "rocedures are co%bined A) $rue ) alse Answer# $er%s# !esign and "erfor%ance for%at audit "rocedures !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining 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# /anage%ent+s assertions for sales and collection activities !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills *0
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# /isstate%ents involving the co%"leteness objective for sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 0*) Iiolations 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# Iiolations of the e.istence objective for sales2 violations of the co%"leteness objective !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 00) An effective "rocedure to test the e.istence objective for sales is to vouch sales journal entries to co"ies of sales orders8 shi""ing docu%ents8 and sales invoices A) $rue ) alse Answer# A $er%s# ;rocedure to test the e.istence objective for sales !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 04) or each significant internal control deficiency identified by the auditor8 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# &ignificant internal control deficiency2 $ests of controls !iff# Challenging Objective# LO 14-0 AAC&# Analytic sills
*4
06) $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 of controls for se"aration of duties !iff# /oderate Objective# LO 14-0 AAC&# (eflective thining sills 07) &ales should be billed and recorded as soon as "ossible after the shi"%ent taes "lace A) $rue ) alse Answer# A $er%s# 3nternal control !iff# /oderate Objective# LO 14*8 1408 and 146 AAC&# (eflective thining 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 ) /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# $ransaction-related audit objectives2 Credit %e%os !iff# Challenging Objective# LO 14-4 AAC&# (eflective thining 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 ) reuire 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# ictitious credit %e%os2 ;rocedure to "revent activity !iff# /oderate Objective# LO 14-4 AAC&# Analytic sills
*6
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 is %ateriality 3n %any instances8 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 allowances8 auditors usually e%"hasi9e testing recorded transactions to uncover any theft of cash fro% the collection of accounts receivable that was covered u" by fictitious sales returns and allowances $er%s# $ransaction-related audit objectives for credit %e%os and sales !iff# Challenging Objective# LO 14-4 AAC&# (eflective thining sills 4) When auditors evaluate sales returns and allowances8 a "ri%ary e%"hasis is on the objective of occurrence A) $rue ) alse Answer# A $er%s# &ales returns and allowances2 Objective of occurrence !iff# 'asy Objective# LO 14-4 AAC&# (eflective thining sills 6) &ales returns and allowances are often ignored by auditors because they are often i%%aterial A) $rue ) alse Answer# A $er%s# &ales returns and allowances2 3%%aterial !iff# /oderate Objective# LO 14-4 AAC&# (eflective thining sills 7) When auditing sales returns and allowances8 the e%"hasis is nor%ally on testing the co%"leteness objective A) $rue ) alse Answer# $er%s# Auditing sales returns and allowances2 Co%"leteness objective !iff# /oderate Objective# LO 14-4 AAC&# (eflective thining sills
*7
Learning Objective 14-6 1) When an e%"loyee who is authori9ed to %ae custo%er entries in the accounts receivable subsidiary ledger8 "ur"osefully enters cash received into the wrong custo%er+s account that e%"loyee %ay be sus"ected of# A) iting ) la""ing C) floating !) shorting Answer# $er%s# '%"loyee authori9ed to %ae custo%er entries !iff# /oderate Objective# LO 14-6 AAC&# Analytic sills *) An audit "rocedure that co%"ares the na%e8 a%ount8 an d dates shown on re%ittance advices8 either "a"er of electronic via direct de"osit8 with cash recei"ts journal entries and with related du"licate de"osit sli"s would be effective in detecting# A) iting ) la""ing C) illicit write-offs of custo%ers as uncollectible accounts !) sales without "ro"er credit authori9ation Answer# $er%s# Audit "rocedure co%"ares na%es with cash recei"ts journal entries !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills
*<
0) $o "revent fraud8 %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 Des Des Des ) O"ening %ail fro% custo%ers Jo
'ntering sales transactions Jo
'ntering cash recei"ts transactions Des
O"ening %ail fro% custo%ers Jo
'ntering sales transactions Des
'ntering cash recei"ts transactions Des
O"ening %ail fro% custo%ers Des
'ntering sales transactions Jo
'ntering cash recei"ts transactions Jo
C)
!)
Answer# C $er%s# raud2 Cash access !iff# /oderate Objective# LO 14*8 1408 and 146 AAC&# (eflective thining 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# Audit "rocedure2 ;roof of cash recei"ts !iff# /oderate Objective# LO 14-6 AAC&# Analytic sills
*=
6) 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# Audit "rocedures2 $est co%"leteness objective @assertion) for cash recei"ts !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills 7) When designing tests of controls and substantive tests of transactions for cash recei"ts8 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 tradedF Answer# $er%s# !esigning tests of controls and substantive tests of transactions for cash recei"ts !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills <) Cash recei"ts fro% sales on account have been %isa""ro"riated Which of the following acts would conceal this fraud and be least liely to be detected by an auditor? A) Bnderstating 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 !) Bnderstating the cash recei"ts journal by "ur"osely recording incorrect a%ounts Answer# A $er%s# Cash recei"ts fro% sales on account2 /isa""ro"riated2 raud !iff# Challenging Objective# LO 14-6 AAC&# (eflective thining sills
*>
=) 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, "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 has access to both checs fro% custo%ers and currency fro% daily cash recei"ts C) ave custo%ers send "ay%ents directly to the co %"any+s de"ository ban !) (euest that custo%er+s "ay%ent checs be %ade "ayable to the co%"any and addressed to the treasurer Answer# C $er%s# ;revent la""ing "roble% !iff# Challenging Objective# LO 14-6 AAC&# (eflective thining sills >) ;re"aration of a "roof of cash would not be useful in discovering differences 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# ;roof of cash !iff# Challenging Objective# LO 14-6 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"ared8 @*) 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"orts8 and @4) are state%ents sent to custo%ers each %onth $er%s# Co%"leteness assertion for cash recei"ts and e.isting controls !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills
0
11) '."lain what la""ing %eans8 and discuss the internal control deficiency that allows it to occur Also discuss the "rocedures the auditor can "erfor% to detect la""ing Answer# La""ing8 which is a co%%on ty"e of e%be99le%ent8 is the "ost"one%ent of entries for the collection of receivables to conceal an e.isting cash shortage $he e%be99le%ent is "er"etrated by a "erson who handles cash recei"ts and then enters the% into the co%"uter syste% e or she defers recording the cash recei"ts fro% one custo%er and covers the shortages with subseuent recei"ts fro% another $hese in turn are covered fro% the recei"ts of a third custo%er a few days later $he e%"loyee %ust continue to cover the shortage through re"eated la""ing8 re"lace the stolen %oney8 or find another way to conc eal the shortage $he e%be99le%ent can be easily "revented by segregation of duties and a %andatory vacation "olicy for e%"loyees who hand cash and enter cash recei"ts into the syste% 3t can be detected by co%"aring the na%e8 a%ount8 and dates shown on re%ittance advices with cash recei"ts8 journal entries and related du"licate de"osit sli"s ecause this "rocedure is relatively ti%e-consu%ing8 it is ordinarily "erfor%ed only when s"ecific concerns with e%be99le%ent e .ist because of a deficiency in internal control $er%s# La""ing2 3nternal control deficiency !iff# Challenging Objective# LO 14-6 AAC&# (eflective thining sills 1*) Dou are "art of the audit tea% that is auditing illsburg ardware Co and you have been assigned to the sales and collection business "rocess Dou are testing whether the cash received has been recorded in the cash recei"ts journal @co%"leteness objective Fassertion) List two tests of controls and at least one test of transactions that you would do to satisfy yourself regarding the co%"leteness assertion Answer# Control $ests# 1 Observe "relisting of cash recei"ts * Observe endorse%ent of inco%ing checs 0 '.a%ine file of batch totals to initials of data control cler 4 Observe whether %onthly state%ents are sent $ransaction $ests# 1 $race a%ounts of "relisted cash recei"ts to the cash recei"ts journal8 testing for na%es8 a%ounts8 dates * Co%"are the "relisting with the du"licate de"osit sli" $er%s# &ales and collection business "rocess2 $ests of controls and test of transactions for co%"leteness objectiveFassertion !iff# Challenging Objective# LO 14-6 AAC&# (eflective thining sills
01
10) 3n "lanning the audit8 an auditor taes 0 basic ste"s in deter%ining the audit "rocedures to be "erfor%ed for any business cycle or class of 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# G !eter%ine ey internal controls for each audit objective G !esign tests of controls for each control used to su""ort a reduced control ris G !esign substantive tests of transactions to test for %onetary %isstate%ents for each objective $er%s# Audit "rocedures "erfor%ed for business cycle or class of transactions !iff# Challenging Objective# LO 14-6 AAC&# (eflective thining sills 14) $he %ost difficult ty"e of cash e%be99le%ent for the auditor to detect is when the cash is stolen before it can be recorded in the cash recei"ts journal A) $rue ) alse Answer# A $er%s# Cash e%be99le%ent !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills 16) An essential "art of the auditors res"onsibility in auditing cash recei"ts is to identify deficiencies in internal control that increase the lielihood of fraud A) $rue ) alse Answer# A $er%s# Cash recei"ts fro% sales on account2 /isa""ro"riated2 raud !iff# /oderate Objective# LO 14-6 AAC&# (eflective thining sills Learning Objective 14-7 1) $he auditor+s "ri%ary concern in "erfor%ing audit "rocedures of the write-off of uncollectible accounts relates to the ris that the client writes offs custo%er accounts that have already been collected $he "ri%ary control for "reventing this fraud is# A) e.a%ining authori9ed credit %e%os ) e.a%ining the uncollectible account authori9ation for% C) e.a%ining debit %e%os !) e.a%ining the vouchers "ayable register Answer# $er%s# Audit "rocedures2 Write-off of uncollectible accounts2 raud !iff# Challenging Objective# LO 14-7 AAC&# (eflective thining sills 0*
