13) In many audits of sales transactions substantive tests of transactions can be reduced in
determining the completeness objective because
A) understatements of assets and income are a greater concern than overstatements.
B) overstatements of assets and income are a greater concern than understatements.
C) it doesn’t matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two
financial statements will not be misleading.
14) To determine that sales are accurately recorded, the unit prices on the duplicate sales
invoices are normally compared with
A) the original invoices.
B) an approved master price list.
C) the amounts recorded in the sales journal for that transaction.
D) the amounts posted to the customer’s account in the accounts receivable master file.
15) Prenumbered documents are intended to help
A)
Prevent the failure to bill or
record sales
Prevent duplicate billings or
recordings of sales
Yes
Yes
B)
Prevent the failure to bill or
record sales
Prevent duplicate billings or
recordings of sales
No
No
C)
Prevent the failure to bill or
record sales
Prevent duplicate billings or
recordings of sales
Yes
No
D)
Prevent the failure to bill or
record sales
Prevent duplicate billings or
recordings of sales
No
Yes
16) Prenumbered documents will only be useful for control purposes if
A) a different numerical sequence is used for each company.
B) the sequence is accounted for periodically.
C) employees are allowed to use documents out of numerical sequence.
D) the same numerical sequence is used each accounting period.
17) ________ tests are for omitted transactions, while ________ tests are for nonexistent
transactions.
A) Tracing; vouching
B) Vouching; tracing
C) Verifying; tracking
D) Tracking; verifying
18) Which one of the following best describes the auditors responsibilities regarding appropriate
authorizations in the sales/collections cycle?
A) Credit must be authorized before the sale.
B) Goods must be shipped after the authorization
C) Prices must be authorized.
D) All of the above should be of concern to the auditor.
19) Which type of misstatement is always a fraud?
A) sales included in the journals for which no shipment was made
B) sales to related parties, such as officers and subsidiaries
C) shipments made to nonexistent customers and recorded as sales
D) sales recorded more than once.
20) An auditor needs to determine whether all customers of an electric utility company are being
billed. The auditor should test from the
A) sales register to the accounts receivable ledger.
B) sales register to the meter department records.
C) accounts receivable ledger to the sales register.
D) meter department records to the sales register.
21) Which one of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mail room?
A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.
22) Which of the following is the appropriate point at which the auditor deems authorization to
be critical?
A)
Credit granting
Price authorization
Shipment of goods
Yes
Yes
Yes
B)
Credit granting
Price authorization
Shipment of goods
Yes
No
Yes
C)
Credit granting
Price authorization
Shipment of goods
No
Yes
No
D)
Credit granting
Price authorization
Shipment of goods
Yes
No
No
23) Which of the following would least concern an auditor regarding the lack of a specific
authorization to conduct the sales transaction?
A) granting of credit
B) shipment of goods
C) determination of discounts
D) selling of goods for cash
24) As a test of control, the auditor examines sales invoices for supporting documents. The
relevant transaction-related audit objective is
A) accuracy.
B) occurrence.
C) classification.
D) timing.
25) The accurate recording of sales transactions concerns all of the following except for
A) proper credit authorization.
B) shipping the amount of goods ordered.
C) accurately billing for the amount of goods shipped.
D) accurately recording the amount billed in the accounting records.
26) In designing substantive audit procedures for tests of transactions for sales, the auditor needs
to test for evidence of misstatements due to errors or fraud. Describe two potential errors
(unintentional) and one intentional (fraud).
27) For each of the following potential misstatements, provide one potential audit test that could
be used to detect the misstatement.
• sales included in the journals for which there was no shipment
• sale recorded more than once
• shipments made to nonexistent customers and recorded as sales
28) The auditor is concerned about authorization at three key points. What are the key points?
29) Separation of duties in the sales and collection cycle should mandate that the credit-granting
function be separate from the sales function.
30) Tracing from source documents to the journal is useful for testing the existence objective.
31) The extent of tests of controls in audits of nonpublic companies depends on the effectiveness
of the controls and the extent to which the auditor believes they can be relied on to reduce
control risk.
32) For each key control, one or more tests of controls must be designed to verify its
effectiveness.
33) Misstatements involving the completeness objective for sales lead to overstatements of assets
and income.
34) Violations of the occurrence/existence objective for sales are of greater concern to the
auditor than violations of the completeness objective.
35) An effective procedure to test the occurrence/existence objective for sales is to vouch sales
journal entries to copies of sales orders, shipping documents, and sales invoices.
36) For each significant internal control deficiency identified by the auditor, he or she should
design one or more tests of controls to assess the extent of the deficiency and its effect on the
financial statements.
37) The appropriate tests of controls for separation of duties are ordinarily restricted to the
auditor’s observations of activities and discussions with personnel.
38) Auditing standard indicate that if the auditor identifies a significant risk at the assertion level,
the auditor is not required to perform substantive procedures.
14.4 Learning Objective 14-4
1) Except for two key differences, the transaction-related audit objectives are essentially the
same for the processing of credit memos as they are for sales. Which of the following are the two
key differences?
A) risk and emphasis on the completeness objective
B) materiality and emphasis on the accuracy objective
C) risk and emphasis on the classification objective
D) materiality and emphasis on the occurrence objective
2) Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a
customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit
memos to his friend for goods supposedly returned. The most effective procedure for preventing
this activity is to
A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all
credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.
3) The transaction-related audit objectives and the client’s methods of controlling misstatements
are essentially the same for credit memos as for sales with the exception of two differences.
What are the two differences from the auditor’s perspective?
4) When auditors evaluate sales returns and allowances, a primary emphasis is on the objective
of occurrence.
5) Sales returns and allowances are often ignored by auditors because they are often immaterial.
6) When auditing sales returns and allowances, the emphasis is normally on testing the
completeness objective.
14.5 Learning Objective 14-5
1) When an employee who is authorized to make customer entries in the accounts receivable
subsidiary ledger purposefully enters cash received into the wrong customer’s account that
employee may be suspected of
A) kiting.
B) lapping.
C) floating.
D) shorting.
2) An audit procedure that compares the name, amount, and dates shown on remittance advices
with cash receipts journal entries and with related duplicate deposit slips would be effective in
detecting
A) kiting.
B) lapping.
C) unauthorized write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.
3) Which of the following tests of controls is useful to test the transaction-related audit objective
of posting and summarization?
A) Observe whether monthly statements are sent.
B) Observe unrecorded cash at a point in time.
C) Observe whether the accountant reconciles the bank account.
D) Observe endorsement of incoming checks.
4) The audit procedure referred to as proof of cash receipts is particularly useful to test
A) time lags in making deposits.
B) whether all recorded cash receipts have been deposited in the bank.
C) whether there are cash receipts that have not been recorded in the journals.
D) the client’s reconciliation between cash receipts and bank deposits.
5) Which of the following test of controls is useful to test the completeness objective for cash
receipts?
A) Compare shipping documents with sales records.
B) Observe endorsement of incoming checks.
C) Examine evidence that the receivable master file is reconciled to the general ledger.
D) Observe if the client reconciles the bank account.
6) When designing tests of controls and substantive tests of transactions for cash receipts, it is
important to remember that
A) the test of controls are designed to test for monetary misstatements.
B) auditors use the same methodology for designing tests of controls and substantive tests of
transactions for cash receipts as they use for sales.
C) the tests of controls are not dependent on the controls the auditor identifies.
D) the tests of controls is not dependent on whether the company being audited is publicly
traded.
7) Cash receipts from sales on account have been misappropriated. Which of the following acts
would conceal this fraud and be least likely to be detected by an auditor?
A) understating the sales journal by not recording cash sales
B) overstating the accounts receivable control account by intentionally misstating prices charged
for goods sold
C) overstating the accounts receivable subsidiary ledger by not recording payments made by
customers
D) understating the cash receipts journal by purposely recording incorrect amounts
8) Which of the following would offer the best protection for a company that wishes to prevent a
reoccurrence of a previously detected “lapping” problem with trade accounts receivable?
A) Separate duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
B) Separate duties so that no employee has access to both checks from customers and currency
from daily cash receipts.
C) Have a mandatory vacation policy for employees who both handle cash and enter cash
receipts into the system.
D) Request that customer’s payment checks be made payable to the company and addressed to
the treasurer.
9) The most difficult type of cash embezzlement for auditors to detect is when it occurs
A) after the merchandise has been shipped.
B) before the merchandise has been shipped.
C) before the cash is recorded in the cash receipts journal or other cash listing.
D) after the cash is recorded in the cash receipts journal or other cash listing.
10) The completeness transaction-related audit objective must be considered when determining
key controls for sales. List three of the key controls that must be considered when cash received
is recorded in the cash receipts journal.
11) Explain what lapping means, and discuss the internal control deficiency that allows it to
occur. Also discuss the procedures the auditor can perform to detect lapping.
12) You are part of the audit team that is auditing Hillsburg Hardware Co. and you have been
assigned to the sales and collection cycle. You are testing whether the cash receipts are deposited
and recorded at the amounts received (accuracy objective). List two tests of controls and one test
of transactions that you would do to satisfy yourself regarding the accuracy objective.
13) In planning the audit, an auditor takes three basic steps in determining the audit procedures
to be performed for any business cycle or class of transactions in order to gather audit evidence
concerning possible misstatement due to error or fraud. List those three basic steps below.
14) The most difficult type of cash embezzlement for the auditor to detect is when the cash is
stolen before it can be recorded in the cash receipts journal.
15) An essential part of the auditor’s responsibility in auditing cash receipts is to identify
deficiencies in internal control that increase the likelihood of fraud.
14.6 Learning Objective 14-6
1) The auditor’s primary concern in performing audit procedures of the write-off of uncollectible
accounts relates to the risk that the client writes off customer accounts that have already been
collected. The primary control for preventing this fraud is
A) examining authorized credit memos.
B) examining the uncollectible account authorization form.
C) examining debit memos.
D) examining the vouchers payable register.
2) The estimation of bad debts expense relates to the write-off of uncollectible accounts.
3) There should generally be correspondence in the client’s file establishing the uncollectibility
of their account.
4) Realizable value is an essential balance-related audit objective for accounts receivable.
14.7 Learning Objective 14-7
1) The most significant effect of the results of the tests of controls and substantive tests of
transactions in the sales and collection cycle is on
A) bad debt expense.
B) the analytical tests to be performed.
C) the confirmation of accounts receivable.
D) the impact of processing cash receipts.
2) At the completion of the tests of controls and substantive tests of transactions, auditors must
analyze each exception to determine its cause and the implication of the exception on assessed
control risk.