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33) The net realizable value of accounts receivable is equal to:
A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.
34) When an auditor tests to determine if all existing accounts receivable are included in the aged
trial balance,
A) they cannot rely on the self-balancing nature of the accounts receivable master file.
B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the
understatement of accounts receivable by tests of details of balances.
C) auditors rarely send accounts receivable confirmations to customers with zero balances.
D) unrecorded sales to a new customer are easy to identify for confirmation because that
customer is included in the accounts receivable master file.
35) Describe how the auditor tests the accuracy objective for accounts receivable.
36) Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the
threefold approach an auditor performs for each account above to determine the reasonableness
of the cutoff.
37) Discuss the audit procedures performed when testing the detail tie-in objective for accounts
receivable, and explain why this objective is ordinarily tested before any other objectives for
accounts receivable.
38) Assuming the client's internal controls are effective, describe how the auditor can verify
proper cutoff of sales transactions.
39) Tests of detail tie-in are normally conducted last in the audit of the sales and collections
cycle.
40) The criterion used by most merchandising and manufacturing clients for determining when
revenue recognition takes place is whether title to the goods has passed.
41) After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify
bad debt expense.
42) Tests of the presentation and disclosure-related objectives are generally done as part of the
completion phase of the audit.
43) Confirmation is the most common test of details of balances for the accuracy of accounts
receivable.
44) Tests of the realizable value balance-related audit objective are for the purpose of evaluating
the allowance for doubtful accounts.
45) For most audits, a proper cash receipts cutoff is less important than either the sales or the
sales returns and allowances cutoff since cash only affects the balance sheet, and not earnings.
16.4 Learning Objective 16-4
1) Which of the following is the principle "weakness" of using negative confirmations for the
tests of details of balances for accounts receivable?
A) They can only be used for large balance accounts.
B) They cannot not be used when account balances "bunch" around a mean value.
C) Conclusions drawn from receiving no reply may not be correct.
D) Response rates are generally too low to draw any conclusions.
2) Communication addressed to the debtor requesting him or her to confirm whether the balance
as stated on the communication is correct or incorrect is a
A) representation letter.
B) negative confirmation.
C) bank confirmation.
D) positive confirmation.
3) A type of positive confirmation known as a blank confirmation
A) requests the recipient to fill in the amount of the balance.
B) is considered less reliable than the regular positive confirmation.
C) generates as high a response rate as the regular positive confirmation form.
D) is used when the auditor is confirming several small balances.
4) The most effective audit evidence gathered for accounts receivable is the
A) detail tie-in of the records.
B) analysis of the allowance for doubtful accounts.
C) confirmation of accounts receivable.
D) examination of sales invoices.
5) The audit procedure that provides the auditor with the most appropriate evidence when
performing test of details of balances for accounts receivable is
A) confirmations.
B) recalculation of the aged receivables and uncollectible accounts.
C) tracing credit memos for returned merchandise to receiving room reports.
D) tracing from shipping documents to journals to the accounts receivable ledger.
6) When should auditors not perform alternative procedures in testing the accounts receivable
balance?
A) when customers do not return positive confirmation requests
B) when customers do not return negative confirmation requests
C) when confirmations are deemed to be ineffective as an audit procedure
D) when confirmations are too costly to use
7) A positive confirmation is more reliable evidence than a negative confirmation because
A) fewer confirmations can be sent out.
B) the auditor has a document which can be used in court.
C) the debtor's lack of response indicates agreement with the stated balance.
D) follow-up procedures are performed if a response is not received from the debtor.
8) When positive confirmations are used, auditing standards require alternative procedures for
confirmations not returned by the customer. Which of the following would not be considered an
alternative procedure?
A) Send a second confirmation request.
B) Examine subsequent cash receipts to determine if the receivable has been paid.
C) Examine shipping documents to verify that the merchandise was shipped.
D) Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of
the billing.
9) The positive (as opposed to the negative) form of receivables confirmation may be preferred
when
A) internal control surrounding accounts receivable is considered to be effective.
B) there is reason to believe that a substantial number of accounts may be in dispute.
C) a large number of small balances are involved.
D) the auditor believes that the recipients of the confirmations will give the requests adequate
consideration.
10) An auditor should perform alternative procedures to substantiate the existence of accounts
receivable when
A) no reply to a positive confirmation request is received.
B) no reply to a negative confirmation request is received.
C) collectibility of the receivables is in doubt.
D) pledging of the receivables is probable.
11) Confirmation of accounts receivable balances normally provides evidence concerning the
A) valuation of the balances.
B) rights of the balances.
C) existence of the balances.
D) completeness of the balances.
12) If the auditor decides not to confirm accounts receivable that are material, the auditor should
A) always use alternative procedures to audit the accounts receivable.
B) include copies of customer statements in the audit files.
C) document the reasons for such a decision in the audit files.
D) include copies of customer sales invoices in the audit files.
13) The most reliable evidence from confirmations is obtained when they are sent
A) as close to the balance sheet date as possible.
B) at various times throughout the year to different segments of the sample, so that the entire
sample is representative of account balances scattered throughout the year.
C) several months before the year-end, so the auditor will have adequate time to perform
alternate procedures if they are required.
D) at various times throughout the year to the same group in the sample, so that the sample will
not have a time bias.
14) A type of positive confirmation in which an individual invoice is confirmed, rather than the
customer's entire accounts receivable balance is the ________ confirmation.
A) invoice
B) specific
C) balance
D) voucher
15) Confirmation of accounts receivable provide evidence related to the ________ objectives.
A) existence
B) accuracy
C) cutoff
D) all if the above
16) When determining the timing of the accounts receivable confirmations,
A) the receivables cannot be confirmed at an interim date.
B) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-
forward schedule.
C) if the receivables are confirmed at an interim date, they must also be confirmed at year-end.
D) if internal controls are adequate, the accounts receivable must be confirmed at year-end.
17) When making the sampling decisions for accounts receivable confirmations,
A) it is important to sample some items for every material segment of the population.
B) if management refuses to allow the auditor to send confirmation requests to certain customers,
the auditor must withdraw from the engagement.
C) inherent risk does not impact the sample size.
D) stratification of the sample is discouraged under current auditing standards.
18) U.S. auditing standards indicate that auditors should use external confirmations for accounts
receivable. However, there are certain circumstances where confirmation may not be
appropriated. List these three situations.
19) Describe the differences between positive and negative confirmations. Which type is
generally viewed as more reliable?
20) Discuss the alternative procedures an auditor can perform to test the existence objective for
accounts receivable when customers do not respond to confirmation requests.
21) Discuss the advantages and disadvantages of using negative accounts receivable
confirmations rather than positive confirmations.
22) Briefly describe the circumstances in which it is acceptable to use negative confirmation
requests.
23) Describe each of the following types of confirmations:
• positive confirmation
• blank confirmation
• invoice confirmation
• negative confirmation
24) List three of the major factors affecting sample size for confirming accounts receivable.
25) When an auditor uses negative confirmations, several factors must be considered. What are
those factors?
26) Match seven of the terms (a-k) with the definitions provided below (1-7):
a. accounts receivable balance-related audit objectives
b. aged trial balance
c. alternative procedures
d. blank confirmation form
e. cutoff misstatements
f. evidence planning worksheet
g. negative confirmation
h. positive confirmation
i. realizable value of accounts receivable
j. timing difference in an account receivable confirmation
k. invoice confirmation
________ 1. the follow-up of a positive confirmation not returned by the debtor with the use of
documentation evidence to determine whether the recorded receivable exists
________ 2. a letter, addressed to the debtor, requesting that the recipient indicate directly on the
letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount
________ 3. misstatements that take place as a result of current period transactions being
recorded in a subsequent period, or subsequent period transactions being recorded in the current
period
________ 4. a letter, addressed to the debtor, requesting the recipient to fill in the amount of the
accounts receivable balance.
________ 5. a letter, addressed to the debtor, requesting a response only if the recipient disagrees
with the amount of the stated account balance
________ 6. a reported difference in a confirmation from a debtor that is determined to be a
timing difference between the client's and debtor's records and therefore not a misstatement
________ 7. a listing of the balances in the accounts receivable master file at the balance sheet
date broken down according to the amount of time that has passed between the date of sale and
the balance sheet date
27) A confirmation is a type of audit evidence.
28) The auditor should perform procedures to verify the addresses used for the accounts
receivable confirmations.
29) Both U.S. and international auditing standards require the use of confirmations for accounts
receivable.
30) Blank confirmations are considered less reliable than standard positive confirmations.
31) Negative confirmations are less expensive, and less reliable, than positive confirmations.
32) It is common to use a combination of positive and negative confirmations by sending the
latter to accounts with large balances and the former to those with small balances.
33) If auditors consider confirmations of accounts receivable to be ineffective evidence because
response rates will be inadequate or unreliable, they need not confirm accounts receivable.
34) Negative confirmations normally require a larger sample size than positive confirmations.
35) When sending confirmations during most audits of accounts receivable, the emphasis is often
on confirming larger and older accounts.
36) When a customer disagrees with the amount shown on an account receivable confirmation,
the auditor should not ask the client to reconcile the difference.
37) Auditors must maintain control of confirmations until they are returned from the customer.
38) The confirmations must be mailed by the auditor, but should contain the return address of the
client.
39) Stratification of accounts receivable is desirable when using confirmations.
40) Each client misstatement in accounts receivable must be analyzed to determine whether it
was consistent with the original assessed level of control risk.
1) Which audit procedure would be used to test for the existence balance-related audit objective?
A) Trace ten accounts from the aged trial balance to the accounts receivable master file.
B) Confirm accounts receivable.
C) Review large sales returns and allowances before and after the balance sheet date.
D) Trace ten accounts from the trial balance to the accounts on the master file.
2) The auditor is reviewing the receivables listed on the aged trial balance for notes and related
party receivables. Which balance-related audit objective is he trying to satisfy?
A) detail tie-in
B) existence
C) classification
D) all of the above
3) Which audit procedure would the auditor use to test for the cutoff balance-related audit
objective?
A) Review minutes of the board of directors meetings.
B) Review the accounts receivable trial balance for large items.
C) Use audit software to foot and cross-foot the aged trial balance.
D) Select the last 20 sales transaction from the current year's sales journal and the first 20 from
the subsequent year's and trace each to the related shipping documents.
4) Describe three audit procedures an auditor would use to test for the realizable value balance-
related audit objective
5) To determine if the client has rights to the accounts receivable on the trial balance, the auditor
should inquire of management if any receivables are pledged or factored.
6) To test for the completeness balance-related audit objective, the auditor should review the
accounts receivable trail balance for large or unusual items.
