Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 16 Completing the Tests in the Sales and Collection Cycle: Accounts Receivable
16.1 Learning Objective 16-1
1) The two primary classes of transactions in the sales and collection cycle are
A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.
2) The appropriate and sufficient evidence to be obtained from tests of details must be decided
on an
A) efficiency basis.
B) effectiveness basis.
C) objective-by-objective basis.
D) none of the above
3) Auditors are especially concerned with three aspects of internal control for the sales and
collection cycle. Which of the following is not one of their major concerns?
A) controls over cutoff
B) controls that prevent or detect embezzlements
C) controls over sales discounts
D) controls related to the allowance for uncollectible accounts
4) For sales, the occurrence transaction-related audit objective affects which of the following
balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in
5) For cash receipts, the occurrence transaction-related audit objective affects which of the
following balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in
6) Which of the following is an accurate statement regarding the risk assessment process of
phase I of the audit process for the sales and collection cycle?
A) Auditors must perform substantive tests related to assertions deemed to have significant risks.
B) The auditor must relate control risk for transaction-related audit objectives to balance-related
audit objectives in deciding planned inherent risk.
C) The realizable value balance-related audit objectives are affected by assessed control risk for
classes of transactions.
D) All of the above are accurate statements.
7) For sales, the completeness transaction-related audit objective affects the existence balance-
related audit objective.
8) Recording a sale that did not occur violates the occurrence transaction-related audit objective
and the existence balance-related audit objective.
9) The accounts receivable balance-related audit objective net realizable value is not affected by
assessed control risk for sales or cash receipts.
10) The results of the tests of controls determine whether assessed control risk for sales and cash
receipts needs to be revised.
11) Auditors use the results of the substantive tests of transactions of sales and the collection
cycle to determine the extent to which inherent risk is satisfied for each accounts receivable
balance-related audit objective.
12) For most audits, revenue recognition is considered to be a significant risk.
16.2 Learning Objective 16-2
1) Which of the following types of receivables would not deserve the special attention of the
auditor?
A) accounts receivables with credit balances
B) accounts that have been outstanding for a long time
C) receivables from related parties
D) each of the above would receive special attention.
2) Analytical procedures are substantive tests and, if the results of the analytical procedures are
favorable, the auditor would normally
A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.
3) Analytical procedures
A) are only done during the planning of the audit and when performing detailed tests.
B) performed during the detailed testing phase are done before tests of details of balances.
C) performed during the detailed testing phase are done before the balance sheet date.
D) are performed only on accounts receivable, not on the entire sales and collection cycle.
4) Which of the following is a correct statement regarding analytical procedures?
A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts
payable will be the likely offsetting misstatement.
B) Auditors should also compare the results of their analytical procedures to budgets and
industry trends.
C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be
correct.
D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is
involved.
5) An auditor is comparing the write-off of uncollectible accounts as a percentage of total
accounts receivable with previous years. A possible misstatement this procedure could uncover
is
A) overstatement or understatement of sales.
B) overstatement or understatement of accounts receivable.
C) overstatement or understatement of bad debt expense.
D) overstatement or understatement of sales returns and allowances.
6) Below are listed possible misstatements that could occur in the sales and collections cycle.
Provide the analytical procedure that would be most useful in detecting the possible
misstatement.
a. overstatement of sales and accounts receivable
b. uncollectible accounts receivable that have not been provided for
c. overstatement of sales returns and allowances
7) Favorable results from analytical procedures may reduce the extent to which the auditor needs
to test details of balances.
8) When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the
auditor should make additional inquiries of management.
9) A high inherent risk increases planned detection risk and decreases planned substantive tests.
16.3 Learning Objective 16-3
1) The understatement of sales and accounts receivable is best uncovered by
A) testing internal controls.
B) testing the aged accounts receivable trial balance.
C) substantive tests of transactions for shipments made but not recorded.
D) substantive tests of transactions for bad debts.
2) Tests of which balance-related audit objective are normally performed first in an audit of the
sales and collection?
A) accuracy
B) completeness
C) rights
D) detail tie-in
3) A listing of the balances in the accounts receivable master file at the balance sheet date,
including individual customer balances outstanding and a breakdown of each balance by the time
passed between the date of the sale and the balance sheet date, is the
A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.
4) Testing the information on the aged trial balance for detail tie-in is a necessary audit
procedure, which would normally include
A)
Test-footing the total column
and the columns depicting the
aging
Comparing the total of the aged trial balance
with the general ledger accounts receivable
account
Yes
Yes
B)
Test-footing the total column
and the columns depicting the
aging
Comparing the total of the aged trial balance
with the general ledger accounts receivable
account
No
No
C)
Test-footing the total column
and the columns depicting the
aging
Comparing the total of the aged trial balance
with the general ledger accounts receivable
account
Yes
No
D)
Test-footing the total column
and the columns depicting the
aging
Comparing the total of the aged trial balance
with the general ledger accounts receivable
account
No
Yes
5) Audit procedures designed to uncover credit sales made after the client’s fiscal year-end that
relate to the current year being audited provide evidence for which of the following audit
objectives?
A) realizable value
B) accuracy
C) cutoff
D) existence
6) Cutoff misstatements occur when
A)
The auditor fails to obtain
the end-of-year bank
statement directly from the
bank, obtaining instead the
statement which includes
the two succeeding weeks
Subsequent period
transactions are
recorded in the
current period
Current period
transactions are
recorded in the
subsequent period
Yes
Yes
No
B)
The auditor fails to obtain
the end-of-year bank
statement directly from the
bank, obtaining instead the
statement which includes
the two succeeding weeks
Subsequent period
transactions are
recorded in the
current period
Current period
transactions are
recorded in the
subsequent period
Yes
No
Yes
C)
The auditor fails to obtain
the end-of-year bank
statement directly from the
bank, obtaining instead the
statement which includes
the two succeeding weeks
Subsequent period
transactions are
recorded in the
current period
Current period
transactions are
recorded in the
subsequent period
No
Yes
Yes
D)
The auditor fails to obtain
the end-of-year bank
statement directly from the
bank, obtaining instead the
statement which includes
the two succeeding weeks
Subsequent period
transactions are
recorded in the
current period
Current period
transactions are
recorded in the
subsequent period
No
Yes
No
7) Cutoff misstatements occur
A) either by error or fraud.
B) by error only.
C) by fraud only.
D) randomly without causes related to errors or fraud.
8) Which of the following is likely to be determined first when performing tests of details for
accounts receivable?
A) Recorded accounts receivable exist.
B) Accounts receivable in the aged trial balance agree with related master file amounts, and the
total is correctly added and agrees with the general ledger.
C) The client has a right to the accounts receivable.
D) Existing accounts receivable are included.
9) An auditor is performing a credit analysis of customers with balances over 60 days due. She is
most likely obtaining evidence for which audit related objective?
A) realizable value
B) existence
C) completeness
D) occurrence
10) The most important test of details of balances to determine the existence of recorded
accounts receivable is
A) tracing details of sales invoices to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) the confirmation of customers’ balances.
11) Because of its central role in auditing of accounts receivable, which of the following would
normally be one of the first items tested?
A) accounts receivable master file
B) customer file
C) aged trial balance
D) sales register
12) Confirmation of accounts receivable selected from the trial balance is the most common test
of details of balances for the ________ of accounts receivable.
A) presentation
B) valuation
C) accuracy.
D) detail tie-in
13) Most tests of accounts receivable are based on what schedule, file, or listing?
A) sales master file
B) aged accounts receivable trial balance
C) accounts receivable master file
D) accounts receivable general ledger account
14) If the client’s internal control for recording sales returns and allowances is evaluated as
ineffective,
A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.
15) A customer mails and records a check to a client for payment of an unpaid account on
December 30. The client receives and records the amount on January 2. The records of the two
organizations will be different on December 31. This represents
A)
A cutoff misstatement
A timing difference
Yes
Yes
B)
A cutoff misstatement
A timing difference
No
No
C)
A cutoff misstatement
A timing difference
Yes
No
D)
A cutoff misstatement
A timing difference
No
Yes
16) Which of the following audit procedures would not likely detect a client’s decision to pledge
or factor accounts receivable?
A) a review of the minutes of the board of directors’ meetings
B) discussions with the client
C) confirmation of receivables
D) examination of correspondence files
17) When do most companies record sales returns and allowances?
A) during the month in which the sale occurs
B) during the accounting period in which the return occurs
C) whenever the customer contacts the company regarding the credit
D) during the month after the sale occurs
18) Cutoff misstatements can occur for
A)
Sales
Sales returns and allowances
Yes
Yes
B)
Sales
Sales returns and allowances
No
No
C)
Sales
Sales returns and allowances
Yes
No
D)
Sales
Sales returns and allowances
No
Yes
19) The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is
to
A) perform extensive detailed testing of cutoff.
B) evaluate the client’s control procedures around cutoff.
C) confirm a sample of transactions near period end with customers.
D) confirm transaction with customers.
20) Which of the following audit procedures would normally be included in the audit plan when
auditing the allowance for doubtful accounts?
A) Send positive confirmations.
B) Inquire of the client’s credit manager.
C) Send negative confirmations.
D) Examine sales invoices.
21) Generally accepted accounting principles require that revenue be reported net of sales returns
and allowances
A) if practical.
B) if required by industry practice.
C) if the amounts are material.
D) any of the above
22) For which of the following accounts is cutoff least important?
A) sales
B) sales returns and allowances
C) cash collections
D) inventory
23) Which of the following most likely would be detected by a review of a client’s sales cutoff?
A) excessive sales discounts
B) unrecorded sales for the year
C) unauthorized goods returned for credit
D) lapping of year-end accounts receivable
24) How might the auditor determine whether a client has limited rights to accounts receivable?
A)
Inquiries of the client
Yes
B)
Inquiries of the client
No
C)
Inquiries of the client
No
D)
Inquiries of the client
Yes
25) You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales
when title to the merchandise passes to the buyer, then the books and records would contain
errors if the December 31 entries were for sales recorded
A) before the merchandise was shipped.
B) at the time the merchandise was shipped.
C) several days subsequent to shipment.
D) at a time after the point at which title passed.
26) A procedure to test for a cash receipts cutoff error is
A) reconciling the bank statement.
B) performing a four-column proof-of-cash.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to subsequent period bank deposits on the bank statement.
27) If material, all of the following are required to be separately disclosed in the financial
statements except for
A) accounts receivable from officers.
B) accounts receivable from affiliates.
C) sales and assets for different business segments.
D) sales for the last ten days of the fiscal year.
28) For effective internal control, employees maintaining the accounts receivable subsidiary
ledger should not also approve
A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.
29) For most audits, a proper cash receipts cutoff is less important than the sales cutoff because
the improper cutoff of cash
A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.
30) One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing
individual noncurrent balances on the aged trial balance is
I. it is difficult to compare the results of the current year with those of the previous year.
II. current accounts are ignored in establishing the adequacy of the allowance.
A) I only
B) II only
C) both I and II
D) neither I nor II
31) An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is to satisfy the audit objective of
A) accuracy.
B) existence.
C) control.
D) completeness.
32) When designing tests of details of balances, an important point to remember is
A) auditors emphasize income statement accounts.
B) the audit procedures selected depends heavily on whether planned evidence for a given
objective is low, medium, or high.
C) if accounts receivable are overstated, then sales will be understated.
D) sales cutoff is the most important test of details of accounts receivable.