Auditing Ch 7 - MC

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Seifer
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Auditing Ch 7 - MC
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2012-04-22 16:49:17
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Auditing Assurance Louwers
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Revenue and Collection Cycle MCs
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  1. Revenues are normally considered to have been earned when

    a. All posibility of return has expired

    b. The company has substantially accomplished what it must to be entitled to the benefits

    c. The cash is collected

    d. Goods have been shipped
    B. Correct - The earning process is complete at this point

    a. Allowances can be made for anticipated returns if the earning process is substantially complete

    c. Under accrual accounting, the cash does not have to be collected, only collectible

    d. This is usually the method for determing "b" but the shipment might be FOB destination
  2. Sales are normally recorded on the date of the

    A. Customer purchase order
    B. Sales Invoice
    C. Payment check
    D. Bill of Lading
    B. This is often the same as the bill of lading date

    a. this only initiates the earning process, it doesn't complete it

    b. this is often the case, but it depends on shipping terms

    d. Under accrual accounting, the company doesn't have to wait for the check to record revenue
    (this multiple choice question has been scrambled)
  3. When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

    A. Sales journal
    B. Accounts receivable listing
    C. Genderal ledger
    D. Cash receipts listing
    B. This would have the balance for confirming

    a. This would not have the outstanding balance; however, there are some times when the auditor confirms the sale instead of the amount receivable

    c. This would not have the individual customer balance

    d. This would not have the balance outstanding
    (this multiple choice question has been scrambled)
  4. Which of the following accouts is not normally part of the revenue and collection cycle?

    A. Purchase returns and alloawances
    B. Cash
    C. Sales
    D. Accounts receivable
    A. Even though this involves shipments, it is considered part of the expenditure and disbursement cycle

    a. This is an essential part of the cycle
    b. this is an essential part of the cycle
    c. Cash is affected by the collections
    (this multiple choice question has been scrambled)
  5. The control procedure "credit sales approved by credit department" is directed toward which transaction assertions?

    A. Occurence
    B. Completeness
    C. Accuracy
    D. Cutoff
    C. Credit approval helps ensure the sale will be collectible

    a. The sale could occur but not be approved for credit
    b. The approval has nothing to do with completeness
    d. Credit approval will not affect when revenue is earning
    (this multiple choice question has been scrambled)
  6. Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable

    a. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail

    b. Separation of duties so that no employee has access to both checks from customers and currency from daily cash receipts

    c. Have customer's payment checks be made payable to the company and addressed to the treasurer

    d. Request the customer's payment checks be made payable to the company and addressed to the treasurer
    C. Nobody in the company has access to cash, therefore it cannot be stolen

    • a. The general ledger bookkeeper doesn't have access to the customer accounts
    • b. There's no advantage to separating access to checks and currency
    • d. Normally checks are made payable to company. That doesn't prevent lapping
  7. Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

    a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supprting evidence

    b. Write-offs must be supported by an aging schedule showing that ony receivables overdue several months have been written off

    c. Write-offs must be approved by a cashier who is in the position to know if the receivables have, in fact, been collected

    d. Write-offs must be authorized by company field sale employees who are in the position to determine the financial standing of the customers
    A. Impropriety of write-offs can be controlled by the review and approval of someone outside the credit department

    • b. even write-offs of old receivables can conceal a cash shortage
    • c. The cashier could be the cause of the shortage
    • d. Write-offs should be separated from the sales function
  8. Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profits to sales may suggest which of the following possibilities?

    A. Merchandising purchase being charged to selling and general expense
    B. Unrecorded purchases
    C. Unrecorded sales
    D. Ficticious sales
    C. Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (actually, the gross profit numerator will decrease at a greater rate than the sales denominator in the ratio, causing the ratio to decrease)

    a. This would increase gross profit
    c. This would increase gross profit
    d. This would increase sales and cost of sales, and the ratio would not change. If cost of sales is not recorded, gross profit would increase
    (this multiple choice question has been scrambled)
  9. An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

    A. All sales have been recorded
    B. Entries in the accounts receivable subsidiary ledger were properly invoiced
    C. Sales invoices represent bona fide sales
    D. All sales invoices have been properly posted to custmer accounts.
    B. Vouching is used to establish support for recorded amounts

    a. this doesn't verify that the sales invoices represent actual shipments
    b. this would require tracing the shipping documents to invoices
    c. this would require tracing from invoices to customer accounts
    (this multiple choice question has been scrambled)
  10. An auditor noted that client sales increased 10 percent for the year. At the same time COGS as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent

    Based on the information above, the auditor is most likely concerned about

    A. Improper sales cutoff
    B. Unrecorded costs
    C. Improper credit approvals
    D. Ficticious sales
    D. Ficticious sales would increase sale. Since no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for ficticious sales is accounts receivable, causing accounts receivable to increase

    a. Unrecorded costs would not increase sales
    b. Improper credit approvals would not lower COGS. Goods were shipped for these sales and COGS as a percentage of sales would be unchanged
    c. Improper sales cutoff would not decrease COGS as a percent of sales
    (this multiple choice question has been scrambled)
  11. An auditor noted that client sales increased 10 percent for the year. At the same time COGS as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent

    Based on the information above, the auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in COGS was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation?

    A. Vouch vender invoices to payments made after year-end
    B. Send confirmations asking customers about unit prices paid for product
    C. Perform addition inquiries wiht sales personnnel
    D. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices
    D. Reviewing the chances in pricing during the year and ensuring that customers were charged the new prices would provide sufficient, reliable evidence to support the sames manager's representations

    a. additional inquiries would not provide sufficient corroborating evidence
    c. This is an ineffective use of confirmations and requires responders to identify unit costs and report information
    d. Payment on vendor invoices would not indicate that prices ahd increased during the year
    (this multiple choice question has been scrambled)
  12. To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

    A. Petty cash
    B. Miscellaneous income
    C. Sales return
    D. Miscellaneous expense
    C. Using the sales return account would raise the least suspicion because this account is most commonly linked to accounts receivable. A bookkeeper could steal money and "write-off" to unsuspecting customer's balance with a ficticious "sales return"

    a. when an account is recorded as a receivable it is already recorded as revenue. Adding additional revenue would not cover the theft of accounts receivable

    b. receiving money from petty cash would be a poor method to cover the theft of accounts receivable. The money in petty cash would hae to be accounted for and is not likely to be sufficient to cover any significant amounts

    c. Miscellaneious expense would raise suspicion as all miscellaneous accounts are high risk and subject to review. In addition, acounts receivable are usually not written off against an expense
    (this multiple choice question has been scrambled)
  13. Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team concern?

    A. "This amount was paid on December 30th."
    B. "These goods were returned for credit on November 2nd"
    C. "We received this shipment on January 2nd"
    D. "The balance does not reflect our sales discount for paying by January 5th"
    B. This should have been recorded as a reduction to the receivable by 12/31

    a. this payment is probably in transit
    b. this shipment is probably in transit
    d. this occurred after the end of the period
    (this multiple choice question has been scrambled)
  14. A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform

    A. Sent out positive confirmations on a large sample of these accounts
    B. Send out negative confirmations on a large sample of these customers
    C. Prepare a schedule of purchases and payments for these customers
    D. Inquire of the sales manager regarding the accounts receivable terms
    A. The most likely audit step where there are a few large accounts is to send out positive confirmations

    a. A schedule of purchases and payments would be used to test transactions and might be performed
    b. Negative confirmations would not be appropriate choice for large account balances
    c. The terms on the accounts receivable would not provide information on balance and transaction amounts
    (this multiple choice question has been scrambled)
  15. Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses the aging primarily to

    A. Test the accuracy of recorded charge sales
    B. Evaluate internal control over credit sales
    C. Estimate credit losses.
    D. Verify the existence of the recorded receivables
    C. The age of accounts is an indication of credit losses

    a. The aged trial balance provides only indirect evidence about controls
    b. The aged trial balance provides no evidence about accuracy
    d. The aged trial balance provides no evidence about existence
    (this multiple choice question has been scrambled)
  16. Which of the following might be detected by auditor's cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

    A. Lapping year-end accounts receivable
    B. Kiting bank balances
    C. Inflating sales for the year
    ad. Misappropriating merchadise
    C. False sales joournal entries made near the end of the year may have shipping or other documents that reveal later dates or show lack of sufficient documentation

    a. Lapping pertains to cash receipts, not sales
    c. see answer a
    d. This step would not detect misappropriation of merchandise
    (this multiple choice question has been scrambled)
  17. Confirmation of individual accounts receivable balances directly with debtors will, or itself, normally provide the strongest evidence concerning the

    A. Collectibility of the balances confirmed
    B. Existence of the balances confirmed
    C. Internal control over balances confirmed
    D. Ownership of the balances confirmed
    B. Accounts receivable confirmation enables recipients to respond that they ower the company or that they dispute or disagree with the amount the company says they owe

    a. receiving a confirmation is not proof that the customer will pay
    b. Confirmations will not detect if the receivables were sold or factored
    d. Confirmation provides only indirect evidence that controls are working
    (this multiple choice question has been scrambled)
  18. Which of the following is the best reason for prenumbering in numerical sequence such documents as sales orders, shipping documents, and sales invoices?

    A. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions
    B. Enables personnel to determin the proper period recording of sales revenue and receivables
    C. Enables company personnel to determine the accuracy of each document
    D. Enables personnel to determine the validity of recorded transactions
    A. Checking the sequence for missing numbers identifies documents not yet fully processed in the revenue cycle. It does not provide evidence about accuracy, cut-off or occurrence
    (this multiple choice question has been scrambled)
  19. When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

    A. Credit files and reports
    B. Sales invoices with shipping documents and customer sales invoices
    C. Record of accounts receivable write-offs
    D. Cash remittance lists and bank deposit slips
    B. The accounts receivable debits are supposed to represent sales that have been ordered by customers and actually shipped to them

    b. This is not evidence of existence
    c. this provides some evidence about existence, but even if the receivables haven't been paid, they may still be valid
    d. These files will likely not provide evidence about specific sales
    (this multiple choice question has been scrambled)
  20. In the audit of accounts receivable, the most important emphasis should be on the

    A. Existence assertion
    B. completeness assertion
    C. Presentation and disclosure assertion
    D. Rights and Obligations assertion
    A. Financial statement users are more likely to be damaged if assets are found not to exist

    a. this is an important assertion, but financial statement users are less likely to be damaged if assets are found that have not been recorded
    c. Ownership is important, but doesn't matter if the assets don't exist
    d. presentation and disclosure assertion is important, but not as important as existence for asset accounts
    (this multiple choice question has been scrambled)
  21. The negative request form of accounts receivable confirmation is useful particularly when the

    A. Negative confirmations are more appropriate when the assessed level of risk is low, dollar balances on accounts are small, and the auditor believes recipients will give consideration to the confirmations

    • b. The auditor assumes customers are likely to respond to errors
    • c. Because negative confirmations offer higher detection risk, risk of material misstatement should be low when they are used.
    • d. Because negative confirmations offer higher detection risk, risk of material misstatement should be low when they are used.
  22. When accounts receivable are confirmed at an interim date, auditors need not be concerned with

    A. Obtaining a summary of receivables transactions from the interim date to the year-end date
    B. Sending negative confirmations to all the customers as of the year-end date
    C. Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations
    D. Considering a necessity for some additional confirmations as of the balance sheet date if balances have increased materially
    B. mainly because the other three choices are listed as appropriate work to do. Also, customers are likely to ignore negative confirmations after earlier responding to positive confirmations
    (this multiple choice question has been scrambled)
  23. When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

    A. Invoiced sales were shipped
    B. Shipments to customers were invoiced
    C. Recorded sales were shipped
    D. Shipments to customers were recorded as sales
    B. Shipments are traced to customers' invoices. (This does not imply that the invoices were recorded in the sales journal)

    b. See a above. the invoice copies need to be traced to the sales journal and general ledger to determine whether the shipments were recorded as sales
    c. recorded sales were shipped is not established because the sample selection is from shipments, not from recorded sales
    d. see c above
    (this multiple choice question has been scrambled)
  24. Write-offs of doubtful accounts should be approved by

    A. The credit manager
    B. The cashier
    C. The Treasurer
    D. The salesperson
    C. The treasurer or another high-ranking manager should approve write-offs

    a. sales could write-off accounts for their friends to keep them from having to pay
    b. the credit manager may propose write-offs to reduce days outstanding and make him/her look better
    d. the cashier could take receipts and write off the balance
    (this multiple choice question has been scrambled)
  25. When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:

    A. Examine shipping documents
    B. Examine client correspondence files
    C. Send a second request
    D. Do nothing for immaterial balances
    D. As the confirmations are a sample of the account balance, even immaterial items should be followed up as they represent other balances in the universe of receivables

    a. a second request is the first step that should be performed
    c. Shipping documents should be examined to test existence of the receivable
    d. Client correspondence files may also provide evidence the receivable exists
    (this multiple choice question has been scrambled)
  26. Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be deteced by an auditor?

    A. Overstating the accounts receivable control account
    B. Overstating the accounts receivable subsidiary ledger
    C. Understating the cash receipts journal
    D. Understating the sales journal
    D. not recording sales on account in the books of original entry is the most effecting way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation

    b. the control account wouldn't match the total of customer accounts

    c. Customers would catch the overstatement when examining their statements

    d. This is a possibility, but (a) is a better answer. There is less likelihood of getting caught if the sale is never recorded
    (this multiple choice question has been scrambled)
  27. Which of the following internal control activities most likely would deter lapping of collections from customers?

    A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries
    B. Separation of duties between receiving cash and posting the accounts receivable ledger
    C. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries
    D. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval
    B. Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and recovery) when monthy statements are mailed. The best protection is for the customers to send payment directly to the company's depository bank. The next best procedure is to assure that the accounts receivable clerk has no access to cash received by the mail room. Thus, the duties of receiving cash and posting the accounts receivable ledger are segregated

    a. the stolen cash wouldn't be in either of these documents
    b. Lapping is not accomplished through write-offs
    d. See answer (a)
    (this multiple choice question has been scrambled)
  28. The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positiive confirmation to Mr. Jones. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

    a. Control risk was particularly low for accounts receivable

    b. Inherent risk was particularly high for accounts receivable

    c. Mr. Dennis's account was not yet due

    d. Mr. Dennis's account was not with a related party
    b. As detection risk is lower for positive confirmations then negative confirmations, a positive confirmation is more likely when inherent risk is high

    a. a negative confirmation might be used if control risk is low

    c. Whether the account is due or not usually doesn't affect the type of confirmation. However if it is long past due, a positive confirmation is more appropriate

    d. a related party amount may be a factor that influences a decision to send a positive confirmation. The fact that this account was not a related party would likely lead the auditor to choose a negative confirmation

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