11) An effective procedure to test for unbilled shipments is to trace from the
A) sales history file to the shipping documents.
B) shipping documents to the sales history file .
C) sales history file to the accounts receivable ledger.
D) sales history file to the general ledger sales account.
12) Which of the following procedures would ordinarily be expected to best reveal unrecorded
sales at the balance sheet date?
A) Compare shipping documents with sales invoices.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace payments received subsequent to the balance sheet date.
D) Send accounts receivable confirmation requests.
13) To determine that sales are accurately charged, the unit prices on the duplicate sales invoices
are normally compared with
A) the original invoices.
B) the amounts recorded in the sales journal for that transaction.
C) the amounts posted to the customer’s account in the accounts receivable master file.
D) an approved item master file.
14) Which of the following is an example of a key internal control for an online system that
would help ensure that recorded sales are for the amount of goods shipped and are accurately
billed and recorded?
A) Shipping documents are matched to invoices.
B) Shipping details are automatically used as the invoicing source.
C) Shipping documents are prenumbered and accounted for.
D) Transactions are summarized daily for posting to the general ledger.
15) Invoices are prepared using a date equal to the shipping date. This control pertains to which
transaction-related audit objective?
A) posting and summarization
B) classification
C) cutoff
D) completeness
16) After the auditor has identified the key internal controls and weaknesses and assessed control
risk, it is appropriate to decide whether
A) substantive tests will be increased sufficiently to justify the cost of performing tests of
controls.
B) substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.
C) tests of controls will be increased sufficiently to justify the cost of performing substantive
tests.
D) tests of controls will be reduced sufficiently to justify the cost of performing substantive tests.
17) Certain internal controls satisfy more than one objective. It is desirable to consider
A) each objective separately.
B) the objectives together.
C) the objectives that can be tested.
D) only the controls that satisfy the more than one objective.
18) For each control on which the auditor plans to rely to reduce assessed control risk, he or she
must
A) design one or more tests of controls to verify its effectiveness.
B) report all weaknesses in the management letter.
C) quantitatively determine the effect on sampling error.
D) ensure that the test applies to several different transaction audit objectives.
19) Which one of the following audit procedures is a dual-purpose test?
A) Conduct analytical review to determine the reasonableness of the bad debt allowance.
B) Examine credit limit changes for authorization.
C) Calculate the accuracy of the accounts receivable aging.
D) Observe error message when incorrect customer number is entered.
20) The auditor traces items from the source documents to the journals in order to satisfy the
A) existence objective.
B) completeness objective.
C) accuracy objective.
D) classification objective.
21) An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to satisfy the audit objective of
A) accuracy.
B) completeness.
C) control.
D) existence.
22) The auditor traces items from the journals back to the source documents in order to satisfy
the
A) occurrence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.
23) It is important that sales be billed and recorded in the journal as soon as possible after
A) the order is received.
B) the order is received and credit is approved.
C) credit is approved and it is verified that there is enough inventory to fill the order.
D) shipment takes place.
24) It is common to test sales for proper classification as part of testing for
A) cutoff.
B) accuracy.
C) valuation.
D) completeness.
25) What is one of the advantages of converting procedures from a design to a performance
format?
A) Obtain audit evidence of better quality
B) Help the auditor select the procedures to be performed
C) Eliminate duplicate procedures
D) Ensure compliance with Canadian Auditing Standards
26) Which of the following key controls helps ensure that sales transactions are classified to the
correct account?
A) Computer checks for gaps in shipping document numbers.
B) Invoices are prepared using prices and terms from the customer master file.
C) Management reviews sales reports regularly for reasonableness.
D) Posting is done automatically to the sales account based upon periodic totals.
27) Outline the key areas that the auditor would review as part of general controls.
28) A) State the five specific transaction-related audit objectives for sales and describe one
common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for sales.
29) A) Describe each of the six key control activities for sales.
B) When assessing planned control risk for sales, the auditor is concerned about proper
authorization at three key points. Discuss each of these three points.
C) When testing the existence objective for sales, the auditor is concerned with the possibility of
three types of misstatements. One type is sales being including in the journal for which no
shipment was made. Discuss the other two types of misstatements.
30) You are the audit senior responsible for a large photofinishing centre and camera store. The
store uses automated cash registers tied to inventory (also known as point of sale devices). The
point of sale devices take advantage of automated procedures and controls that can be
programmed, to reduce errors and improve controls over completeness of transactions.
Required:
Provide examples of interdependent controls that should be used to complement the programmed
controls.
31) Office Design Inc. (ODI) has been your audit client for five years. ODI designs and sells
office furniture, such as desks, cabinets, and couches used in reception areas. ODI has sales in
Canada and the U.S., with five distribution locations, where furniture is available to prospective
purchasers to try out before purchasing. These locations are in Toronto, Montreal, Halifax, New
York and Chicago. The company uses custom designed software for its order processing and
sales, kept current by one of the five information systems personnel.
The Vice President Finance is new. Executive management is paid based upon a salary and a
bonus based upon the annual net income of ODI. Unfortunately, the accounting staff at head
office (Montreal) has been downsized from ten people to six due to a recent slowdown in sales.
Your review of the aged accounts receivable trial balance revealed that one third of the accounts
have been outstanding for more than one year. ODI’s profits have declined substantially from last
year. The line of credit and bank loans are at their maximum, and the company is considering
selling its U.S. operations to provide cash flow.
Prior year working papers revealed few errors and that you considered management integrity to
be good. However, due to segregation issues, you did not rely on the internal controls in the prior
year.
Required:
A) What issues in corporate governance and in the control environment affect your assessment of
internal controls for revenue? How does this affect the decision to conduct substantive testing
(i.e. exclusion of tests of controls)?
B) What is the likely assessment of computer general controls? How does this affect the type of
audit testing conducted at ODI?
32) Chong Manufacturing Limited (CML) is a small manufacturer that supplies parts to the
automotive industry. CML deals primarily with second tier companies, and does not deal with
the car manufacturers directly. Last year, CML was required to implement EDI (electronic data
interchange), otherwise two of its major customers would have taken their business elsewhere.
The installation was provided by Simon’s Computer Company, a local computer store with
expertise in EDI. One of CML’s customers, Delta Parts Limited, also sent a purchasing agent to
CML to help train staff at CML in the use of EDI and to walk through the first few transactions
with CML accounting personnel to ensure that they could use the system effectively.
A typical EDI sale is processed as follows:
Delta sends a purchase order to CML, which is received via the internet into an EDI in-basket.
CML empties the EDI in-basket using its EDI software every hour, and the EDI software edits
the purchase order for completeness and obvious errors. If there are no problems, then the
purchase order is printed out and used by CML to process the order.
Once the order has been processed, CML prepares its shipping documentation and invoice using
its normal packaged accounting software. The shipping document and the electronic invoice are
transferred to the EDI software and placed in an EDI out-basket. Accounting staff transmit the
contents of the EDI out-basket to their customer (e.g. Delta).
Once Delta receives the electronic shipping documents and electronic invoices, it will transfer
the funds electronically to CML’s bank account to pay for the goods delivered. This means that
CML receives payment much faster than when invoices were mailed to customers.
Required:
A) What is the impact of the new EDI system on the audit engagement?
B) List some controls that should be included in the new EDI system.
12.3 Describe the methodology for designing controls over sales returns and allowances, cash
receipts transactions and uncollectable accounts
1) The emphasis for the audit of sales return and allowances is often placed on testing the
existence of recorded transactions. However, the most important objective to consider is
A) cut-off.
B) valuation.
C) accuracy.
D) completeness.
2) The most difficult type of cash defalcation for the auditor to detect is that which occurs
A) before the cash is recorded.
B) after cash is recorded but before it goes to the bank.
C) out of the balance kept in a cash register.
D) in amounts under $100.
3) Which one of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mailroom? The cashier
A) prepares the daily deposit.
B) makes the daily deposit at a local bank.
C) records the receipts to the customer files.
D) endorses the cheques with the company endorsement stamp.
4) The appropriate test of controls for separation of duties is
A) documentation.
B) confirmation.
C) examination.
D) observation.
5) Cash receipts from sales on account have been misappropriated. Which of the following acts
would conceal this defalcation and be least likely to be detected by an auditor?
A) postponing recording of cash receipt entries
B) overstating the accounts receivable control account
C) overstating the accounts receivable subsidiary ledger
D) recording cash receipt entries early
6) The defalcation process, which postpones entries for the collection of accounts receivable to
conceal an existing cash shortage, is referred to as
A) kiting.
B) lapping.
C) computer fraud.
D) financial statement fraud.
7) An audit procedure which 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) illicit write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.
8) Which of the following internal control procedures will most likely prevent the concealment
of a cash shortage resulting from the improper write-off of a trade account receivable? Write-offs
must be
A) approved by a responsible officer after review of credit department recommendations and
supporting evidence.
B) supported by an aging schedule showing that only receivables overdue several months have
been written off.
C) approved by the cashier who is in a position to know if the accounts receivable have, in fact,
been collected.
D) authorized by company field sales employees who are in a position to determine the financial
standing of the customers.
9) A) State the five specific transaction-related audit objectives for cash receipts and describe
one common test of controls for each objective.
B) Discuss what is meant by proof of cash receipts and explain its purpose.
12.4 Illustrate the risk assessment and audit of sales and cash receipts using Hillsburg Hardware
Limited to describe the typical audit process through tests of controls
1)
A)
B)
C)
D)