Chapter 9 – Auditing the Revenue Cycle
1. The revenue cycle considered by auditors includes the sales process but not collections.
a.
True
b.
False
False
United States – BUSPORG: Analytic
Cycles
2. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the
transaction and collecting the receivable.
a.
True
b.
False
True
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United States – BUSPORG: Analytic
Cycles
3. The shipping department confirms the shipment of goods by completing the packing slip and returning it to
the purchasing department.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Cycles
4. Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement
of all open items.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Cycles
5. Invoices are processed, including their mailing to customers, only subsequent to proof of valid delivery to
customers.
a.
True
b.
False
True
6. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of
authorization.
a.
True
b.
False
False
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United States – BUSPORG: Analytic
Risks
7. A comprehensive chart of accounts and a review of complex or unusual transactions by supervisory
personnel are control procedures necessary for proper classification of accounts.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Risks
8. Formal procedures for approving acceptance of returns that are beyond the warranty period are an appropriate
control procedure for identifying and recording returned goods.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Risks
9. One of the benefits of establishing a formal credit policy for granting credit is that management is freed from
the burden of monitoring accounts receivable.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Risks
10. For many clients, the valuation assertion is the most significant assertion in testing revenue.
a.
True
b.
False
False
1
Cycles
11. An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and
40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details,
20% analytics, and 20% tests of controls.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Risks
12. The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to
revenue misstatements on every engagement.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Revenue Recognition
13. A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it
leases until the customer is ready for the product should record the delivery as revenue.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Revenue Recognition
14. The intentional loading of sales at the end of a period to customers that do not need the goods at that time
should not be recorded as revenues.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Revenue Recognition
15. The basic concept for revenue recognition is the realization of cash.
a.
True
AUDT.JOHN.10.09.05
United States – BUSPORG: Analytic
Significant Accounts, Disclosures and Relevant Assertions
Chapter 9 – Auditing the Revenue Cycle
b.
False
False
1
AUDT.JOHN.16.09-02 – LO: 09-02
United States – BUSPORG: Analytic
Performing Risk Assessment Procedures in the Revenue Cycle
16. A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings
goal.
a.
True
b.
False
True
1
AUDT.JOHN.16.09-02 – LO: 09-02
United States – BUSPORG: Analytic
Performing Risk Assessment Procedures in the Revenue Cycle
17. A consistent pattern of earnings growth would eliminate the auditor’s concern for fraud in revenue
recognition.
a.
True
b.
False
False
1
AUDT.JOHN.16.09-03 – LO: 09-03
United States – BUSPORG: Analytic
Identify and Assess Fraud Risks in the Revenue Cycle
18. An attitude of professional skepticism by the auditor is not needed when internal controls over revenue have
been tested and found to be effective.
a.
True
b.
False
False
1
AUDT.JOHN.16.09-03 – LO: 09-03
United States – BUSPORG: Analytic
Identify and Assess Fraud Risk in the Revenue Cycle
19. The auditor should be alert to the risk of material misstatements when cash flows from operations are
negative and net income (rather than loss) is reported.
a.
True
b.
False
True
20. Ratio analysis performed by the audit team may include the comparison of gross profit percentage to
industry averages.
a.
True
b.
False
True
1
AUDT.JOHN.16.09-05 – LO: 09-05
United States – BUSPORG: Analytic
Performing Preliminary Analytical Procedures for Revenue Cycle Accounts
21. The auditor’s determination that day’s sales in accounts receivable increased from 44 days to 100 days
would usually be found through the use of ratio analysis.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Analytics
22. Edge and Gregg, LLP would most likely discover a client’s first-time use of channel stuffing through the
use of trend analysis.
a.
True
b.
False
True
1
AUDT.JOHN.16.09-05 – LO: 09-05
United States – BUSPORG: Analytic
Performing Preliminary Analytical Procedures for the Revenue Cycle
23. Use of reasonableness tests by Bono Mullins, PC will include relationships between financial but not non-
financial data.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
24. The auditor has determined that the control risk for the existence assertion is low; therefore the auditor may
1
United States – BUSPORG: Analytic
Analytics
Chapter 9 – Auditing the Revenue Cycle
reduce the number of items tested on a substantive basis.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Controls
25. Confirmations of bank accounts may help the auditor to determine if material amounts of accounts
receivable have been sold to the bank on a recourse basis.
a.
True
b.
False
False
1
AUDT.JOHN.10.09.01
United States – BUSPORG: Analytic
Revenue Cycle
26. When the auditor seeks evidence concerning the allowance for doubtful accounts he or she would most
likely use an aged trial balance to help identify past due balances.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Audit of Allowance
27. Current auditing standards do not require the confirmation of receivables if accounts receivable are not
material.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing of accounts Receivable
28. Accounts receivable confirmation letters should be prepared on the auditing firm’s letterhead.
a.
True
b.
False
29. Alternative procedures to the confirmation of receivables include review of subsequent collections and
examination of supporting evidence.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
30. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
31. Positive accounts receivable confirmations should be used on all accounts which represent small immaterial
balances.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
32. When the client has a large number of relatively small accounts receivable and the assessed level of control
risk for receivables and related revenue transactions is high, the auditor is more likely to use negative
confirmations.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
33. The auditor would examine a sample of sales transactions throughout the entire period to determine if sales
were recorded in the proper period when performing a sales cutoff test.
a.
True
b.
False
United States – BUSPORG: Analytic
Testing Accounts Receivable
Chapter 9 – Auditing the Revenue Cycle
False
1
United States – BUSPORG: Analytic
Testing Revenue
34. An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and
marketing manager.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Controls
35. An auditor would test control over the objective of the occurrence of sales transactions by sampling
recorded revenues and tracing them back to invoices and shipping documents.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Controls
36. If control risk is assessed high, the auditor may send significantly fewer confirmations for a sample of
accounts receivable than if the control risk is assessed low.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Linkage
37. In planning an audit for the revenue cycle, the auditor must realize the integrated relationship of evidence
found between the accounts receivable and the notes payable accounts.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Planning
38. A method of testing for the completeness of sales is to test the sequence of sales invoices used during the
period under audit.
Chapter 9 – Auditing the Revenue Cycle
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Planning
39. Material debit balances in accounts payable for amounts due from vendors should be reclassified as
accounts receivable.
a.
True
b.
False
True
1
AUDT.JOHN.10.09.01
United States – BUSPORG: Analytic
Revenue Cycle
40. The use of audit software makes the audit of the revenue cycle more effective, but not more efficient.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Revenue
41. Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately
prior to period end and immediately following period end.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Revenue
42. Valid evidence obtained in an audit for testing the cutoff of gross sales includes receiving reports for
returned merchandise.
a.
True
b.
False
True
43. An example of a test for completeness in the revenue cycle includes the sampling of shipping documents
and tracing them to the sales journal and general ledger.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Revenue
44. Negative confirmations are more expensive to administer than positive confirmations because of the added
costs of investigating non-responses.
a.
True
b.
False
False
1
AUDT.JOHN.10.09.01
United States – BUSPORG: Analytic
45. Exceptions found in the confirmations of accounts receivable balances need not be projected as errors to the
population as they are typically isolated errors.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
46. A timing difference type of exception in the confirmation process may include a misunderstanding by the
reader as to the date being confirmed.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
47. Negative confirmations are considered to be more persuasive than positive confirmations.
United States – BUSPORG: Analytic
Revenue Cycle
Chapter 9 – Auditing the Revenue Cycle
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
48. The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the
response rate.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
49. An auditor’s primary concern with identifying related party sales and receivables rests with the presentation
and disclosure assertion.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Testing Accounts Receivable
50. Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Fraud Indicators
51. The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be
indicators of fraudulent activity.
a.
True
b.
False
True
1
52. Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a
percentage of sales.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
Audit of Allowance
53. The auditor will come up with an independent estimation of the allowance for doubtful accounts based on a
thorough understanding of the client and the client’s business that is compared to the recorded allowance.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Audit of Allowance
54. It is beneficial in the testing of notes receivable to confirm not only the balance of the notes, but also their
terms.
a.
True
b.
False
1
United States – BUSPORG: Analytic
Audit of Allowance
55. The most important control to ensure completeness of sales and shipping is pre-numbered shipping and
billing documents.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
Planning
56. An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful
accounts.
a.
True
b.
False
57. Which of the following processes are included in the revenue cycle?
a.
Shipping products to customers.
b.
Sending disbursements to suppliers.
c.
Issuance of capital stock.
d.
Preparation of a time card.
United States – BUSPORG: Analytic
58. Which of the following is the best example of the control objective in the revenue cycle that all transactions
are recorded accurately?
a.
Sales are recorded at the invoice price expected to be collected from customers.
b.
Sales orders have sequential numbering.
c.
Recorded sales transactions are evidenced by valid invoices and shipping documents.
d.
Credits to customer accounts are classified as liabilities.
United States – BUSPORG: Analytic
59. Which of the following is a formal document that conveys responsibility for shipped merchandise to the
shipper?
a.
Sales invoice
b.
Receiving report
c.
Bill of Lading
d.
Purchase order
United States – BUSPORG: Analytic
Significant Accounts, Disclosures and Assertions in the Revenue Cycle
60. Credit approval policies are implemented by organizations primarily to accomplish which of the following
objectives?
a.
To determine revenue recognition policies.
b.
To ensure customer satisfaction.
c.
To prevent lapping by the accounts receivable department.
d.
To ensure the realization of receivables.
Audit of Allowance
61. Sales transactions should be documented at initiation in order to accomplish which of the following
objectives?
a.
To provide the customer a copy of the transaction.
b.
To provide evidence of authorization and recording.
c.
To offer credit to customers.
d.
To generate back orders.
United States – BUSPORG: Analytic
62. The significance of the bill of lading is to provide which of the following?
a.
The warehouse personnel with the product that must be shipped to customers.
b.
Invoices to customers for proper collection.
c.
A credit application for customer approval.
d.
Evidence of title transfer of goods to customers.
United States – BUSPORG: Analytic
63. The risk of material misstatement due to fraud relating to revenue recognition should be
a.
approached in a manner that is identical to control risk assessment.
b.
given lower priority to the risk of embezzlement.
c.
ordinarily presumed by the auditor.
d.
assumed to have been considered by the FASB.
United States – BUSPORG: Analytic
Revenue Recognition
64. A method used by companies to fraudulently inflate revenues includes which of the following?
a.
Use of hidden “side letters” giving the customer an irrevocable right to return the product.
b.
Recording of fictitious sales.
c.
Shipment of product not ordered by customers.
d.
All of the above.
United States – BUSPORG: Analytic
65. Which of the following evidences delivery of product to customers sufficient for company recording as
revenues?
a.
A check received from the customer.
b.
An agreement to purchase product signed by the customer.
c.
A pick ticket in the warehouse.
d.
A bill of lading and tracking number with the shipper.
United States – BUSPORG: Analytic
Revenue Recognition
66. Which of the following must exist prior to the recognition of revenue by a company from the sale of a
product?
a.
The cash is realized on the sale of the product.
b.
A price is discussed based upon the customer’s resale of the product.
c.
The customer is given the option to return the product at any time.
d.
The product is adequately delivered to the customer.
United States – BUSPORG: Analytic
Revenue Recognition
67. Fraud related to revenue recognition will most likely be identified by the auditor through which of the
following independent situations?
a.
Sales have increased 5% in the current period over the previous period and is consistent with the
results of competitors.
b.
Gross margin is equivalent in the current period to previous periods and is below that of the industry.
c.
Sales are higher in the month preceding each quarter end.
d.
The sales of a revolutionary new product are increasing beyond that of the competition in the periods
immediately following its introduction.
United States – BUSPORG: Analytic
68. Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing
which of the following?
a.
Trend analysis.
b.
Ratio analysis.
c.
Reasonableness testing.
United States – BUSPORG: Analytic
Revenue Recognition
Chapter 9 – Auditing the Revenue Cycle
d.
Non-statistical sampling.
United States – BUSPORG: Analytic
69. A cross-sectional analysis of revenue recorded across multiple sales location is a form of what type of
testing?
a.
Trend analysis
b.
Common size analysis
c.
Ratio analysis
d.
Regression analysis
United States – BUSPORG: Analytic
Revenue Cycle
70. Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores. Lithgow and Harris
relates annual revenue by sales per square feet and sales per customer. What type of analysis is Lithgow and
Harris most likely performing?
a.
Ratio analysis.
b.
Critical analysis.
c.
Reasonableness tests.
d.
Non-statistical analysis.
United States – BUSPORG: Analytic
71. In an audit of financial statements, the risk of the high rate of return of products sold includes relates to
which of the following?
a.
Sales that are recorded improperly.
b.
An estimate of accrued returns that reduces net income.
c.
A reduction of net sales for an increase to the sales returns and allowance account.
d.
Consignment goods that are returned and forwarded to third parties.