Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 14 Audit of the Sales and Collection Cycle: Tests of Controls
and Substantive Tests of Transactions
14.1 Learning Objective 14-1
1) Which of the following is an account that is not affected by the sales and collection cycle?
A) cash
B) accounts receivable
C) allowance for doubtful accounts
D) accounts payable
2) The auditor’s objectives for the sales and cash collections activities when the client is
primarily an e-commerce business as compared to a “brick and mortar” business are
A) unchanged.
B) expanded.
C) mitigated.
D) decreased.
3) The overall objective in the audit of the sales and collection cycle is to evaluate whether the
account balances affected by the cycle are fairly presented in accordance with accounting
standards.
4) The sales and collection cycle applies to businesses that sell goods to customers or provide
services to customers.
14.2 Learning Objective 14-2
1) Which of the following is not one of the five classes of transactions included in the sales and
collection cycle?
A) sales returns and allowances
B) write-off of uncollectible accounts
C) bad debt expense
D) interest income
2) What event initiates a transaction in the sales and collection cycle?
A) receipt of cash
B) delivery of product to a customer
C) identification of a new customer
D) customer request for goods or services
3) A ________ is a document that indicates a request for merchandise by a customer.
A) sales invoice
B) vendor invoice
C) customer order
D) sales order
4) A ________ is a document for communicating the description, quantity, and related
information for goods ordered by a customer.
A) sales order
B) customer order
C) vendor invoice
D) sales invoice
5) What critical event must take place before goods can be shipped in order to assure payment
can be reasonably expected?
A) determination of correct delivery address
B) credit approval
C) matching of shipping document with sales invoice
D) receipt of sales order from the customer
6) Before goods are shipped on account, a properly authorized person must
A) prepare the sales invoice.
B) approve the journal entry.
C) approve the customer’s credit.
D) verify that the unit price is accurate.
7) One type of shipping document is the ________, which is a written contract between the
carrier and the seller of the receipt and shipment of goods.
A) sales order
B) bill of lading
C) sales invoice
D) customer order
8) The document used to indicate to the customer the amount of a sale and payment due date is
the
A) sales invoice.
B) bill of lading.
C) purchase order.
D) sales order.
9) Which of the following is not an important aspect of billing?
A) All shipments made have been billed.
B) No shipment has been billed more than once.
C) Each customer is billed for the proper amount.
D) Credit is approved to customers for sales on account.
10) Most companies recognize sales revenue when
A) sales are invoiced.
B) payment is received from the customer.
C) goods are shipped.
D) the customer’s order is received.
11) Which of the following is not a business function within the “Sales” class of transactions?
A) processing customer orders
B) granting credit
C) processing and recording sales returns and allowances
D) shipping goods
12) The total of the individual account balances in the accounts receivable master file should
equal the
A) total sales for the period.
B) balance of the sales account in the general ledger.
C) total sales less the total cash received for the period.
D) balance of the accounts receivable account in the general ledger.
13) In the accounts receivable master file, the length of time the account has been due can be
useful to the client and the auditor in preparing the
A) trial balance.
B) working trial balance.
C) accounts receivable trial balance.
D) aged accounts receivable trial balance.
14) A document sent to each customer showing his or her beginning accounts receivable balance
and the amount and date of each sale, cash payment received, any debit or credit memo issued,
and the ending balance is the
A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.
15) The document that accompanies the customer’s payment is the
A) credit memo.
B) remittance advice.
C) vendor invoice.
D) monthly statement.
16) A ________ indicates a reduction in the amount due from a customer because of returned
goods or an allowance.
A) bill of lading
B) sales invoice
C) credit memo
D) monthly statement
17) A ________ is a list prepared when cash is received by someone who has no responsibility
for recording sales, accounts receivable, or cash, and who has no access to the accounting
records.
A) prelisting of cash receipts.
B) sales invoice.
C) packing ticket.
D) vendor invoice.
18) When dealing with the processing and recording of cash receipts,
A) the most important concern is the theft of cash.
B) theft can only occur before the receipts are entered into the records.
C) cash receipts should be deposited at least monthly.
D) the monthly statement is used to prepare the cash receipts journal.
19) Some companies have customers send payments directly to an address maintained by a bank.
This is called a(n) ________ system.
A) direct deposit
B) funds transfer
C) lockbox
D) interbank transfer
20) Which of the following is a business function related to sales returns and allowances?
A) processing customer orders
B) writing off uncollectible accounts
C) processing and recording credit memos
D) granting credit
21) For a firm that practices good internal controls in the sales and collections cycle, the function
of indicating credit approval should be recorded on which of the following documents?
A) sales order
B) sales invoice
C) customer order
D) remittance advice
22) When posting items sold on account from the sales journal
A)
Details of the journal are posted to
Journal totals are posted to
The sales account
The general ledger
B)
Details of the journal are posted to
Journal totals are posted to
The sales account
The accounts receivable subsidiary ledger
C)
Details of the journal are posted to
Journal totals are posted to
The accounts receivable master file
The general ledger
D)
Details of the journal are posted to
Journal totals are posted to
The accounts receivable account in the
general ledger
The sales account in the general ledger
23) Which document or record is used in the write-off of uncollectible accounts classes of
transactions?
A) general journal
B) remittance advice
C) sales transaction file
D) sales order
24) Who is generally responsible for opening receipts when a company uses a lockbox to speed
the handling of cash receipts?
A) company personnel
B) temporary employees in the town where the lockbox is located
C) bank employees
D) company controller
25) Which of the following is a correct statement regarding the shipment of goods?
A) The shipping document must be in paper form.
B) The shipping document is used to update the perpetual inventory records.
C) Only one copy of the shipping document is needed.
D) All of the above are correct statements.
26) Which accounts are involved in the sales class of transactions?
A) accounts receivable and sales returns and allowances
B) cash and allowance for uncollectible accounts
C) sales allowances and accounts receivable
D) accounts receivable and sales
27) Explain each of the following types of documents and indicate the class of transactions in
which they are commonly used.
1. customer order
2. shipping document
3. remittance advice
4. sales returns and allowance journal
5. uncollectible account authorization form
28) You are an audit manager for Rodgers & Co. and have recently taken on a new client,
Manufacturing Company. You are in the initial stages of planning the audit and have decided to
start gathering information about the sales/collection cycle of the business. List below the classes
of transactions that you need to gather audit evidence for in designing your audit procedures.
29) Customer billing is a critical process which auditors must understand. What are the most
important aspects of billing and what are the related objectives?
30) Discuss the four business functions that result in sales transactions in a typical sales and
collection cycle and, for each function, state the key documents and records involved.
31) Match seven of the terms for documents and records (a-k) with the descriptions provided
below (1-7):
a. customer order form
b. sales order
c. bill of lading
d. sales invoice
e. summary sales report
f. accounts receivable master file
g. monthly statement
h. remittance advice
i. prelisting of cash receipts
j. credit memo
k. uncollectible account authorization form
________ 1. A list prepared when cash is received by someone who has no responsibility for
recording sales, accounts receivable, or cash, and has no access to the accounting records. It is
used to verify whether cash received was recorded and deposited at the correct amounts and on a
timely basis.
________ 2. A document indicating a reduction in the amount due from a customer because of
returned goods or an allowance.
________ 3. A document prepared to initiate shipment of goods, indicating the description of the
merchandise, the quantity shipped, and other relevant data. It is a written contract between the
carrier and seller of the receipt and shipment of goods.
________ 4. A document for communicating the description, quantity, and related information
for goods ordered by a customer. This is frequently used to indicate credit approval and
authorization for shipment.
________ 5. A document mailed to the customer and typically returned to the seller with the
cash payment.
________ 6. A document used internally to indicate authority to write-off an account receivable
as uncollectible.
________ 7. A document or electronic record indicating the description and quantity of goods
sold, the price, freight charges, insurance, terms, and other relevant data.
32) A sales invoice is a document that usually indicates credit approval.
33) Credit should be approved before a customer’s order is received.
34) Credit should be approved before goods are shipped to a customer.
35) The receipt of a customer order from a customer is the starting point for the entire sales and
collection cycle.
36) The preparation of a sales invoice is the final step in the sales and collection cycle.
37) A bill of lading is a special type of sales invoice used when goods are shipped interstate.
38) The shipping point is critical because it is the first point at which company assets are
released to another party.
39) A bill of lading is a written contract between the seller and the buyer.
40) In a lockbox system, bank employees are responsible for opening cash receipts and
maintaining records of all payments made by customers at the lockbox address.
41) Sales transactions are the result of the following five functions in the sales and collection
cycle: processing customer orders, granting credit, shipping goods, billing customers, and
recording sales.
42) The prelisting of cash receipts should be prepared by the individual who has primary
responsibility for the recording of cash receipts.
43) A credit memo is a document used internally that indicates authority to write-off an account
receivable as uncollectible.
44) If a company uses a periodic inventory system, the shipping records are used to update the
inventory quantities.
45) The sales journal is generated from the sales transaction file.
46) When customers purchase goods by credit card, the issuer of the credit card uses EFT to
transfer funds into the company’s bank account.
47) The theft of cash can occur before receipts are entered in the records or after they are entered
in the records.
14.3 Learning Objective 14-3
1) When designing audit procedures, tracing of source documents to the customers subsidiary
ledger and subsequently to the general ledger is done to satisfy what assertion?
A) valuation
B) cutoff
C) completeness
D) classification
2) When assessing risk control, the auditor must do all of the following except
A) assess control risk for each objective by evaluating the controls and deficiencies for each
objective.
B) perform the detailed test of balances.
C) identify the key internal controls and deficiencies.
D) associate the key controls and deficiencies with the objectives.
3) When sales invoices are automatically calculated and posted by a computer, the auditor may
be able to reduce substantive tests of transactions for which, if any, assertion?
A) accuracy
B) existence
C) completeness
D) none of the above
4) In many audits, no substantive tests of transactions are made for the ________ assertion on the
grounds that understatement of sales is not a concern.
A) accuracy
B) existence
C) completeness
D) none of the above
5) Which one the following procedures performed for the billing function provides evidence for
the completeness assertion?
A) making sure that all shipments have been billed
B) making sure that no shipment has been billed more than twice
C) making sure that each shipment is billed at the correct amount
D) making sure that each shipment is billed to the proper customer
6) When assessing planned control risk for sales,
A) the key internal controls and deficiencies for sales will be the same for every company.
B) the audit objectives for sales will differ from company to company.
C) a flowchart is required to help assess control risk for sales.
D) assessing control risk for sales is a highly subjective decision.
7) Which of the following is an accurate statement relating to separation of duties?
A) Management should deny cash access to anyone responsible for entering sales and cash
receipts transaction information into the computer.
B) All disagreements on the monthly statements should be directed to a designated person who
has no responsibility for handling cash or recording sales or accounts receivable.
C) The credit granting function should be separate from the sales function.
D) All of the above are accurate statements.
8) Which of the following is not a key control for sales and cash receipts?
A) active board of directors
B) adequate separation of duties
C) internal verification procedures
D) adequate documents and records
9) Which one of the following statements is true? In deciding on substantive tests of transactions
A) some procedures are commonly employed on every audit regardless of the circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the tests of
controls.
C) results obtained in the prior year’s audit will not affect the procedures used this year.
D) the materiality of the item will not influence the choice of procedures used.
10) To test for recorded sales for which there were no actual shipments, the auditor vouches from
the
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.
11) An effective procedure to test for unfilled shipments is to trace from the
A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.
12) The auditor traces items from the source documents to the journals in order to accumulate
audit evidence that will satisfy the
A) existence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.