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103 Cards in this Set
- Front
- Back
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Ch. 14
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Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
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LO-1
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LO-1
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1) Which of the following is not an account affected by the sales and collection cycle?
A) Cash B) Accounts receivable C) Allowance for doubtful accounts D) Sales of Accounts Receivables |
D) Sales of Accounts Receivables
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2) The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are:
A) unchanged. B) expanded. C) mitigated. D) decreased. |
A) unchanged.
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3) The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Accounting standards.
A) True B) False |
A) True
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4) The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses.
A) True B) False |
A) True
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LO-2
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LO-2
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1) Which of the following is not one of the five classes of transactions included in the sales and collection cycle?
A) Sales returns and allowances B) Write-off of uncollectible accounts C) Bad debt expense D) Interest Income |
D) Interest Income
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2) What event initiates a transaction in the sales and collection cycle?
A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods |
D) customer request for goods
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3) A ________ is a document that indicates a request for merchandise by a customer.
A) sales invoice B) vendor invoice C) customer order D) sales order |
C) customer order
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4) A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.
A) sales order B) customer order C) vendor invoice D) sales invoice |
A) sales order
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5) What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?
A) determination of correct delivery address B) credit approval C) matching of shipping document with sales invoice D) receipt of sales order from the customer |
B) credit approval
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6) Before goods are shipped on account, a properly authorized person must:
A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate. |
C) approve the customer's credit.
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7) A document prepared to initiate shipment of the goods sold by an independent shipper is the:
A) sales order. B) bill of lading. C) sales invoice. D) customer order. |
B) bill of lading.
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8) The document used to indicate to the customer the amount of a sale and payment due date is the:
A) sales invoice. B) bill of lading. C) purchase order. D) sales order. |
A) sales invoice.
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9) In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized?
A) sales approval B) credit approval C) cash collection D) shipment of goods |
D) shipment of goods
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10) Most companies recognize sales revenue when:
A) sales are invoiced. B) goods are received by the customer. C) goods are shipped. D) Both B and C are correct, depending upon the company's revenue recognition policies. |
C) goods are shipped.
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11) Which of the following is not a business function within the "Sales" class of transactions?
A) processing customer orders B) granting credit C) processing and recording sales returns and allowances D) shipping goods |
C) processing and recording sales returns and allowances
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12) The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:
A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger. |
D) balance of the accounts receivable account in the general ledger.
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13) In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the:
A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance. |
D) aged accounts receivable trial balance.
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14) A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the:
A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice. |
B) monthly statement.
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15) The document that accompanies the customer's payment is the:
A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement. |
B) remittance advice.
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16) The document that requires adjustments to the customers subsidiary ledger account is the:
A) bill of lading. B) sales invoice. C) credit memo. D) monthly statement. |
C) credit memo.
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17) A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
A) bill of lading. B) sales invoice. C) picking ticket. D) vendor invoice. |
A) bill of lading.
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18) The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods.
A) bill of lading B) sales invoice C) picking ticket D) remittance advice |
A) bill of lading
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19) Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system.
A) direct deposit B) funds transfer C) lockbox D) interbank transfer |
C) lockbox
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20) In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:
A) sales returns and allowances transaction file. B) accounts receivable master file. C) cash receipts journal. D) sales returns and allowances will be recorded in all of the above. |
C) cash receipts journal.
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21) For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?
A) sales order B) sales invoice C) customer order D) remittance advice |
A) sales order
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22) When posting items from the sales journal, details of the journal and journal totals are posted to which items?
A) Details of the journal are posted to Journal totals are posted to The sales account The general ledger B) Details of the journal are posted to Journal totals are posted to The sales account The accounts receivable subsidiary ledger C) Details of the journal are posted to Journal totals are posted to The accounts receivable master file The general ledger D) Details of the journal are posted to Journal totals are posted to The accounts receivable account in the general ledger The sales account in the general ledger |
C)
Details of the journal are posted to Journal totals are posted to The accounts receivable master file The general ledger |
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23) Credit memos are normally issued for what purpose(s)?
A) To adjust the customers balance to the amount owed to the company. B) To assist in the aging of accounts receivable. C) To reduce customer frustration and sales losses. D) To inform the customer of the balance due. |
A) To adjust the customers balance to the amount owed to the company.
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24) Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
A) company personnel B) temporary employees in the town where the lockbox is located C) bank employees D) company controller |
C) bank employees
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25) One key internal control to prevent fictitious transactions in the sales and collection cycle is:
A) assign a specific customer number for each customer in the computer files. B) to account for the integrity of the numerical sequence of sales orders. C) to include the sales price list of all products in the computer files. D) having bank reconciliations prepared by one who is independent of the treasury function. |
A) assign a specific customer number for each customer in the computer files.
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26) Which of the following is the appropriate point at which the auditor deems authorization to be critical?
A) Credit granting Price authorization Shipment of goods Yes Yes Yes B) Credit granting Price authorization Shipment of goods Yes No Yes C) Credit granting Price authorization Shipment of goods No Yes No D) Credit granting Price authorization Shipment of goods Yes No No |
A) Yes Yes Yes
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27) Sales should be recorded, at the earliest, when:
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) the shipment takes place. |
D) the shipment takes place.
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28) Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash |
D) selling of goods for cash
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29) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to:
A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers. |
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
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35) A sales invoice is a document that usually indicates credit approval.
A) True B) False |
False
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36) Credit should be approved before a customer's order is received.
A) True B) False |
False
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37) Credit should be approved before goods are shipped to a customer.
A) True B) False |
True
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38) The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.
A) True B) False |
True
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39) The preparation of a sales invoice is the final step in the sales and collection cycle.
A) True B) False |
False
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40) A bill of lading is a special type of sales invoice used when goods are shipped interstate.
A) True B) False |
False
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41) The shipping point is critical because it is the first point at which company assets are released to another party.
A) True B) False |
True
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42) A bill of lading is a written contract between the seller and the buyer.
A) True B) False |
False
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43) In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.
A) True B) False |
True
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44) Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.
A) True B) False |
True
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45) The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.
A) True B) False |
False
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46) A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.
A) True B) False |
False
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47) When a company prepares multi-copy, prenumbered sales invoices at the time customer orders are received, there is a higher likelihood of failure to bill the customers than when sales invoices are prepared only after goods have been shipped.
A) True B) False |
False
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48) The auditor's primary concern about authorization centers on shipment of goods to customers.
A) True B) False |
False
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LO-3
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LO-3
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1) When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
A) valuation B) cutoff C) completeness D) classification |
C) completeness
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2) Which of the following documents is not commonly associated with the "cash receipts" class of transactions?
A) Remittance advice B) Sales order C) Prelisting of cash receipts D) Cash receipts journal or listing |
B) Sales order
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3) When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion?
A) accuracy B) existence C) completeness D) none of the above |
A) accuracy
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4) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.
A) accuracy B) existence C) completeness D) none of the above |
C) completeness
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5) Which one the following procedures performed for the billing function provides evidence for the completeness assertion?
A) Making sure that all shipments have been billed. B) Making sure that no shipment has been billed more than twice. C) Making sure that each shipment is billed at the correct amount. D) Making sure that each shipment is billed to the proper customer. |
A) Making sure that all shipments have been billed.
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6) Which of the following procedures performed for the billing function may provide evidence that the accounts receivable subsidiary ledger is in agreement with the accounts receivable control account?
A) Making sure that all shipments have been billed. B) Making sure that no shipment has been billed more than twice. C) Making sure that each shipment is billed at the correct amount. D) Making sure that each shipment is billed to the proper customer. |
C) Making sure that each shipment is billed at the correct amount.
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7) The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:
A) sales order. B) bill of lading. C) sales journal. D) sales invoice. |
D) sales invoice.
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8) In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:
A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls. B) substantive tests can be increased sufficiently to justify costs of performing tests of controls. C) tests of controls can be increased sufficiently to justify costs of performing substantive tests. D) tests of controls can be reduced sufficiently to justify costs of performing substantive tests. |
A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls.
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9) Which one of the following statements is true? In deciding on substantive tests of transactions:
A) some procedures are commonly employed on every audit regardless of the circumstances. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls. C) results obtained in the prior year's audit will not affect the procedures used this year. D) the materiality of the item will not influence the choice of procedures used. |
A) some procedures are commonly employed on every audit regardless of the circumstances.
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10) To test for recorded sales for which there were no actual shipments, the auditor vouches from the:
A) bill of lading to the sales journal. B) sales journal to the shipping documents. C) sales journal to the accounts receivable subsidiary ledger. D) bill of lading to the supporting customer order and sales order. |
B) sales journal to the shipping documents.
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11) An effective procedure to test for unbilled shipments is to trace from the:
A) sales journal to the shipping documents. B) shipping documents to the sales journal. C) sales journal to the accounts receivable ledger. D) sales journal to the general ledger sales account. |
B) shipping documents to the sales journal.
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12) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:
A) existence objective. B) completeness objective. C) ownership objective. D) valuation objective. |
B) completeness objective.
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13) In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:
A) understatements of assets and income are a greater concern than overstatements. B) overstatements of assets and income are a greater concern than understatements. C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. |
B) overstatements of assets and income are a greater concern than understatements.
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14) To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:
A) the original invoices. B) an approved master price list. C) the amounts recorded in the sales journal for that transaction. D) the amounts posted to the customer's account in the accounts receivable master file. |
B) an approved master price list.
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15) Prenumbered documents are intended to help:
A) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes Yes B) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No No C) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales Yes No D) Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales No Yes |
A) Yes Yes
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16) Prenumbered documents will only be useful for control purposes if:
A) a different numerical sequence is used for each company. B) the sequence is accounted for periodically. C) employees are allowed to use documents out of numerical sequence. D) the same numerical sequence is used each accounting period. |
B) the sequence is accounted for periodically.
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17) ________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.
A) Tracing, vouching B) Vouching, tracing C) Verifying, tracking D) Tracking, verifying |
A) Tracing, vouching
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18) Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?
A) B, C, and D should all be of concern to the auditor. B) Credit must be authorized before the sale. C) Goods must be shipped after the authorization. D) Prices must be authorized. |
A) B, C, and D should all be of concern to the auditor.
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19) Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?
A) Sales being included in the journal for which no shipment was made. B) Sales to related parties, such as officers and subsidiaries. C) Sales recorded more than once. D) Shipments being made to nonexistent customers and recorded as sales. |
B) Sales to related parties, such as officers and subsidiaries.
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20) An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the:
A) sales register to the accounts receivable ledger. B) sales register to the meter department records. C) accounts receivable ledger to the sales register. D) meter department records to the sales register. |
D) meter department records to the sales register.
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21) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks. |
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
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24) Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.
A) True B) False |
True
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25) Tracing from source documents to the journal is useful for testing the existence objective.
A) True B) False |
False
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26) Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the auditor.
A) True B) False |
False
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27) Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.
A) True B) False |
True
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28) Misstatements involving the completeness objective for sales lead to overstatements of assets and income.
A) True B) False |
False
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29) Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.
A) True B) False |
True
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30) An effective procedure to test the existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices.
A) True B) False |
True
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31) For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.
A) True B) False |
True
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32) For effective internal control, it is important that sales be recorded as soon after the customer order is received as possible to prevent the unintentional omission of transactions from the records and to make sure that sales are recorded in the proper period.
A) True B) False |
False
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33) Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.
A) True B) False |
False
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LO-4
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LO-4
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1) Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences?
A) Risk and emphasis on the completeness objective. B) Materiality and emphasis on the accuracy objective. C) Risk and emphasis on the classification objective. D) Materiality and emphasis on the occurrence objective. |
D) Materiality and emphasis on the occurrence objective.
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3) When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.
A) True B) False |
True
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4) Sales returns and allowances are often ignored by auditors because they are often immaterial.
A) True B) False |
True
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5) When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.
A) True B) False |
False
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LO-5
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LO-5
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1) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customers account that employee may be suspected of:
A) kiting. B) lapping. C) floating. D) shorting. |
B) lapping.
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2) An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, 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. |
B) lapping.
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3) To prevent fraud, management should deny cash access to anyone responsible for:
A) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes Yes Yes B) Opening mail from customers Entering sales transactions Entering cash receipts transactions No NoYes Yes C) Opening mail from customers Entering sales transactions Entering cash receipts transactions No Yes Yes D) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes No No |
C) No Yes Yes
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4) The audit procedure referred to as proof of cash receipts is particularly useful to test:
A) time lags in making deposits. B) whether all recorded cash receipts have been deposited in the bank. C) whether there are cash receipts that have not been recorded in the journals. D) the client's reconciliation between cash receipts and bank deposits. |
B) whether all recorded cash receipts have been deposited in the bank.
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5) Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?
A) Compare shipping documents with sales records. 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. |
A) Compare shipping documents with sales records.
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6) Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties?
A) Persons having access to cash should also be responsible for recording sales, accounts receivable, and cash. B) Separate the credit-granting function from the sales function. C) Personnel doing internal comparisons should be independent of those entering the original data. D) Anyone responsible for entering sales and cash receipts transactions information into the computer should be denied access to cash. |
A) Persons having access to cash should also be responsible for recording sales, accounts receivable, and cash.
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7) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?
A) Understating the sales journal by not recording cash sales. B) Overstating the accounts receivable control account by intentionally misstating prices charged for goods sold. C) Overstating the accounts receivable subsidiary ledger by not recording payments made by customers. D) Understating the cash receipts journal by purposely recording incorrect amounts. |
A) Understating the sales journal by not recording cash sales.
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8) Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?
A) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have customers send payments directly to the company's depository bank. D) Request that customer's payment checks be made payable to the company and addressed to the treasurer. |
C) Have customers send payments directly to the company's depository bank.
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9) Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:
A) deposits in transit. B) collections on the company's behalf by the bank which are deposited directly to the company's account. C) cash receipts that were not recorded in the relevant accounting records. D) service charges. |
C) cash receipts that were not recorded in the relevant accounting records.
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15) The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.
A) True B) False |
True
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16) The most important audit concern in the processing and recording cash receipts function is not tracing the cash receipts from customers to their subsidiary ledger accounts.
A) True B) False |
False
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LO-6
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LO-6
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1) The auditor would expect that an account receivable from a customer would be written off by the client when which of the following occurs:
A) the customer files for bankruptcy. B) the account is at least six months old. C) a collection agency cannot inspire customer to pay the debt. D) the client company concludes that an amount is no longer collectible. |
D) the client company concludes that an amount is no longer collectible.
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2) The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes offs customer accounts that have already been collected. The primary control for preventing this fraud is:
A) examining authorized credit memos. B) examining the uncollectible account authorization form. C) examining debit memos. D) examining the vouchers payable register. |
B) examining the uncollectible account authorization form.
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3) Generally, audit evidence gathered from the sales and collection cycle is combined with evidence:
A) as the evidence accumulation process proceeds. B) only when all fieldwork processes of the engagement are completed. C) only after the audit of the sales and collection cycle is concluded. D) after the conclusion of both the cash cycle and the sales and collection cycle. |
A) as the evidence accumulation process proceeds.
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