Chapter 11 Accounts Receivable, Notes Receivable, and Revenue

Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue

Chapter 11

Accounts Receivable, Notes Receivable, and Revenue

True / False Questions

1.The department approving a sales transaction should be the shipping department.TrueFalse

2.Accounts receivable that are written-off should not be turned over to a collection agency.TrueFalse

3.An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.TrueFalse

4.Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.TrueFalse

5.Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.TrueFalse

6.CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.TrueFalse

7.Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.TrueFalse

8.Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.TrueFalse

9.When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.TrueFalse

10.Material accounts receivable from related parties should be stated separately from other receivables.TrueFalse

Multiple Choice Questions

11.To test the existence assertion for recorded receivables, an auditor would select a sample from the:A.Sales orders file.B.Customer purchase orders.C.Accounts receivable subsidiary ledger.D.Shipping documents (bills of lading) file.

12.Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?A.Examine bills of lading.B.Physically examine items sold.C.Examine correspondence.D.Examine subsequent cash receipts.

13.Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?A.Sales.B.Cash.C.Inventory.D.Accounts receivable.

14.Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?A.The confirmation requests are sent on the client's letterhead.B.The confirmation requests are mailed to customers by the internal auditors.C.The client's mailroom personnel closely monitor and inspect confirmation requests during mailing.D.The return address on the envelope used to send the confirmation request is that of the client.

15.When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?A.The account balances as of year-end will generally be confirmed.B.The auditors will in general use blank rather than positive confirmation requests.C.The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end.D.Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

16.What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?A.Accounts receivable are overstated at December 31, 20X0.B.Accounts receivable are understated at December 31, 20X0.C.Operating expenses are overstated for the 12 months ended December 31, 20X0.D.Sales returns and allowance are overstated at December 31, 20X0.

17.Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?A.Examine sales invoices.B.Inclusion of the information in the engagement letter.C.Examine correspondence.D.Examine any subsequent cash receipts.

18.Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?A.Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables.B.Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash.C.Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.D.The failure to prepare shipping documents may lead to an understatement of inventory balances.

19.A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?A.Cash receipts.B.Payroll.C.Purchases.D.Sales.

20.Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?A.Examine cash receipts received after year-end.B.Confirm receivables.C.Examine dates of purchase orders.D.Foot the receivables lead schedule.

21.Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?A.Accounts receivable divided by Cost of goods sold.B.Aging of accounts receivable.C.Cash Sales divided by Accounts receivableD.Year 2 accounts receivable compared to year one accounts receivable.

22.For effective internal control, the billing function should not be performed by the:A.Sales department.B.Accounting department.C.Finance department.D.Information Processing department.

23.Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?A.Footing the sales journal.B.Confirming accounts receivable.C.Tracing the total sales in the sales journal to the general ledger.D.Observation of the physical inventory count at year-end.

24.An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by:A.Tracing sales invoices to shipping documents to tests the completeness of reported sales.B.Tracing shipping documents to sales invoices to test the occurrence of reported sales.C.Tracing sales invoices to shipping documents to test the occurrence of reported sales.D.Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

25.The confirmation of accounts receivable is most closely associated with:A.Business risk.B.Detection risk.C.Inherent risk.D.Relative risk.

26.Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?A.A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year.B.Internal control activities over the recording of cash receipts have been improved since the end of the prior year.C.The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.D.The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

27.After the CPAs have selected particular accounts receivable for confirmation:A.As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail.B.It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures.C.All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.D.All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

28.Which of the following manipulations would understate receivables on the financial statements?A.Understatement of cash sales.B.Closing the sales journal prior to year-end.C.Closing the cash receipts journal prior to year-end.D.Underestimating the allowance for doubtful accounts.

29.You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:A.The cash receipts journal was closed before year-end.B.The cash receipts journal was held open after year-end.C.There are many unrecorded liabilities.D.The sales journal was held open after year-end.

30.An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:A.Collection of receivables.B.Purchase of merchandise inventory.C.Payment of accounts payable.D.Sale of long-term debt.

31.Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?A.Merchandise received is not promptly reconciled to the outstanding purchase order file.B.Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.C.The write-off of receivables by personnel who receive cash permits the misappropriation of cash.D.Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

32.Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?A.Investigate confirmation exceptions for indication of amounts in dispute.B.Review accounts which have been written off as uncollectible prior to year-end.C.Investigate credit ratings for large accounts receivable.D.Discuss with the credit manager the current status of doubtful accounts.

33.Which of the following is consistent with effective internal control over sales transactions?A.The accounting department prepares a shipping report authorizing the shipment of goods.B.The accounting department accounts for all receiving reports.C.The billing department accounts for all shipping documents.D.The accounts payable department annually approves the extension of credit to customers.

34.Tracing recorded sales transactions to the bills of lading provides evidence about the:A.Completeness of sales transactions.B.Collectibility of sales transactions.C.Occurrence of sales transactions.D.Billing of all sales transactions.

35.To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:A.Trace a sample of the bills of lading to sales invoices.B.Confirm a sample of accounts payable.C.Review the aging of accounts receivable.D.Trace a sample of recorded sales to shipping documents.

36.Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?A.Reviewing an aging of accounts receivable.B.Examination of cash receipts subsequent to the balance sheet date.C.Confirming current (0-30 day) year-end accounts receivable.D.Reviewing credit files for selected account.

37.Which of the following would indicate the need to use positive accounts receivable confirmation requests?A.A large population consisting of small balances.B.Good internal control over accounts receivable.C.Most accounts are with large reputable companies.D.A large number of accounts receivable are in dispute.

38.Which of the following is not true about the confirmation of accounts receivable?A.Confirmation requests should bear the auditors' return address.B.Confirmation requests should be signed by the auditors.C.Confirmation requests should be mailed directly by the auditors.D.Confirmation requests should include a return envelope addressed to the office of the auditors.

39.Which of the following is not true about the auditors' verification of notes receivable?A.The interest revenue on notes receivable is usually audited by independent computation.B.Inspecting the notes is sufficient evidence of existence of the notes.C.The auditors may evaluate the collectibility of notes by inspecting credit files.D.Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

40.To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:A.The sales journal.B.The billing clerk's file of sales orders.C.Duplicate copies of sales invoices.D.The shipping clerk's file of duplicate copies of bills of lading.

41.Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?A.The positive form for small balances, and the negative form for large balances.B.The positive form used for large balances and the negative form for the small balances.C.The positive form used for trade receivables and the negative form for other receivables.D.The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

42.The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?A.A substantial number of accounts are in disputes.B.The combination of inherent risk and control risk is high.C.Client records include a large number of relatively small balances.D.The auditors believe that recipients of the requests are unlikely to give them consideration.

43.When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:A.Subsequent collections are to be reviewed.B.Internal control over receivables is good.C.Negative confirmation requests are to be used.D.There is a simultaneous examination of cash and accounts receivable.

44.It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:A.Examining subsequent receipts of year-end accounts receivable.B.Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date.C.Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed.D.Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

45.The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:A.Consider internal control over credit sales.B.Test the accuracy of recorded charge sales.C.Estimate credit losses.D.Verify the validity of the recorded receivables.

46.Which of the following is not a primary objective of the auditors in the examination of accounts receivable?A.Determine the approximate realizable value.B.Consider the adequacy of internal control.C.Establish the existence of receivables.D.Determine the expected day of collection of each of the receivables.

47.Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to:A.Increase the balance in the allowance for bad debts accounts.B.Review the going concern ramifications.C.Review the credit and collection policy.D.Expand tests of collectibility.

48.Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?A.Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger.B.Posting to the general ledger and approval of additions and terminations relating to the payroll.C.Custody of unmailed signed checks and maintenance of expense subsidiary ledger.D.Collection of receipts on account and maintaining accounts receivable records.

49.Tracing copies of sales invoices to shipping documents will provide evidence that all:A.Shipments to customers were recorded as receivables.B.Billed sales were shipped.C.Debits to the subsidiary accounts receivable ledger are for sales shipped.D.Shipments to customers were billed.

50.Which of the following is the best argument against the use of negative accounts receivable confirmation requests?A.The cost-per-response is excessively high.B.There is no way of knowing if the intended recipients received them.C.Recipients are likely to feel that in reality the confirmation is a subtle request for payment.D.The inference drawn from receiving no reply may not be correct.

51.When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is:A.Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.B.High, and the individuals receiving the confirmation requests are likely to give them adequate consideration.C.High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.D.Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

52.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.

53.The confirmation process may be performed using a(n):

A.Option AB.Option BC.Option CD.Option D

54.A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a:A.Test of a control.B.Substantive test.C.Cutoff test.D.Statistical test.

55.Which of the following is not one of the criteria for revenue recognition?A.Collectibility is certain.B.Delivery has occurred or services have been rendered.C.Evidence of an arrangement exists and is persuasive.D.A fixed or determinable price to buyer exists.

56.Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except:A.It understates liabilities.B.It overstates revenuesC.It overstates net income.D.It overstates assets.

57.In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?A.Fictitious revenuesB.Timing differencesC.Improper asset valuationsD.Improper disclosures

58.Which of the following revenue related transactions is not linked to the accounts indicated?A.Recognize revenues too early--accounts receivable and revenue.B.Understate allowance for doubtful accounts--bad debt expense, allowance for doubtful accounts.C.Don't write off uncollectible receivables--sales returns, sales discounts.D.Don't record discounts given to customers--cash, sales discounts, accounts receivable.

59.The individual looking for guidance on revenue recognition is most likely to appropriately review:A.APB 99.B.SAB 104.C.ASR 44.D.B1 Document.

60.An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:A.Obsolete inventory has not yet been reduced to fair market value.B.There was an improper cutoff of sales at the end of the year.C.An unusually large receivable was written off near the end of the year.D.The aging of accounts receivable was improperly performed in both years.

61.Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?A.Fax responses.B.Oral responses obtained by the auditor through a telephone call.C.Written responses to negative confirmation requests.D.Written response to confirmations sent out without balances due.

62.Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the:A.Completeness of recording of sales transactions.B.Occurrence of sales transactions.C.Billing of all sales transactions.D.Presentation of payables.

Essay Questions

63.The auditor determines that both of the following objectives will be part of the audit of Anthony Co. For each of the following audit objectives, select the substantive test that would most likely provide support for the objective. A substantive test may be used once, more than once, or not at all.

Selection List

A. Perform tests of subsequent cash receipts after the balance sheet date.B. Review and assess an aging schedule of accounts receivable.C. Compare recognized revenue to related industry statistics.D. Tour the storage facility for inventory to determine adequacy of security controls.E. Perform receiving cutoff procedures.F. Review payments to vendors subsequent to year-end.G. Read the financial statements (including notes) for completeness.

4. The existence of which of the following is most likely to increase audit risk in an audit client?

A. Anthony Co. was started as a local family business and has received additional funding over the years from several investors.B. A new CFO is redesigning Anthony Co.'s accounting policies and procedures.C. Anthony Co. consists of three core business operations: product sales in its retail store, product sales to food and specialty stores, and food services.D. Anthony Co. experienced significant sales growth during its history and continues to expand its product offerings and market reach.

5. Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Co.?

A. Credit terms were restricted on several large accounts during the current year.B. Operating expenses increased at a higher rate than sales revenue.C. Sales revenue increased at a higher rate than operating expenses.D. A smaller percentage of sales occurred during the last month of the year, as compared to the prior year.E. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

64.As part of the fieldwork of an audit engagement, the senior on the audit obtained and documented an understanding of the company's internal control relating to accounts receivable and assessed control risk related to accounts receivable at the maximum level. Susan, the staff person assigned to the engagement, requested and obtained from the company an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, year 2, and sent positive confirmation requests to a sample of the company customers. Review Susan's comments on each of the following confirmations and determine the best conclusion and/or follow-up procedures for each item.Confirmation letters follow. Assume that all confirmations received have been appropriately signed, unless otherwise noted. For each customer in the table below, review the relevant confirmation letter and the comments at the bottom of each. Then double-click on the shaded space in the table, and select the procedure that should be followed to clear the exception, if one exists. Choose only one procedure per confirmation. A procedure may be used once, more than once, or not at all.

Selection list

A. Send a second request for confirmation to the customer.B. Exception noted; propose adjustment and request that the controller post it to the accounting records.C. Verify by examining subsequent cash collections and/or shipping documents.D. Verify that additional invoices noted on confirmation pertain to the subsequent year.E. Not an exception, no further audit work deemed necessary.F. Not an exception, no adjustment necessary. Determine the sufficiency of allowance for doubtful accounts.

Confirmation Letters

February 1, year 3Performance Marine Sales, Inc.1284 River RoadLouisville, Kentucky 40059Re: Balance at December 31, year 2 - $267,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3West Coast Ski Center, Inc.163 Tide AvenueMonterey, California 93940Re: Balance at December 31, year 2 - $414,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3Fish & Ski World, Inc.5660 Ocean Blvd.Port Arkansas, Texas 78373Re: Balance at December 31, year 2 - $72,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3NC Boating Center, Inc.110 Windward Blvd.Tierra Verde, Florida 33715Re: Balance at December 31, year 2 - $239,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3Desert Boats2135 W. Lane Ave.Tempe, Arizona 85287Re: Balance at December 31, year 2 - $60,000

Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience. Sincerely,

Susan's note to file:

65.Confirmation of accounts receivable is presumptively mandatory audit procedure. In performing this procedure, auditors use positive confirmation requests or negative confirmation requests or a combination of both.

a. Describe three conditions which should exist for the auditors to use the negative form of request.b. If a response is not received to an initial positive confirmation request, describe the action that should be taken by the auditors, including a discussion of alternative auditing procedures.

66.Internal control over sales transactions is very important to the effectiveness of an organization.

a. For effective control over credit sales, describe four major functions that should be segregated.b. In addition to adequate segregation of duties, describe two other internal controls over sales transactions.

67.Fraudulent sales are occasionally recorded at year-end as a means of overstating financial results. As examples, companies may engage in inappropriate bill and hold transactions or channel stuffing.

a. Describe two conditions that might indicate the recording of fraudulent sales.b. Define bill and hold transactions and describe the audit significance of such transactions.c. Define channel stuffing and describe the audit significance of this practice.

Chapter 11 Accounts Receivable, Notes Receivable, and Revenue Answer Key

True / False Questions

1.The department approving a sales transaction should be the shipping department.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables2.Accounts receivable that are written-off should not be turned over to a collection agency.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables3.An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue4.Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue5.Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue6.CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue7.Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue8.Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue9.When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue10.Material accounts receivable from related parties should be stated separately from other receivables.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and RevenueMultiple Choice Questions

11.To test the existence assertion for recorded receivables, an auditor would select a sample from the:A.Sales orders file.B.Customer purchase orders.C.Accounts receivable subsidiary ledger.D.Shipping documents (bills of lading) file.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue12.Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?A.Examine bills of lading.B.Physically examine items sold.C.Examine correspondence.D.Examine subsequent cash receipts.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue13.Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?A.Sales.B.Cash.C.Inventory.D.Accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue14.Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?A.The confirmation requests are sent on the client's letterhead.B.The confirmation requests are mailed to customers by the internal auditors.C.The client's mailroom personnel closely monitor and inspect confirmation requests during mailing.D.The return address on the envelope used to send the confirmation request is that of the client.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue15.When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?A.The account balances as of year-end will generally be confirmed.B.The auditors will in general use blank rather than positive confirmation requests.C.The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end.D.Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue16.What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?A.Accounts receivable are overstated at December 31, 20X0.B.Accounts receivable are understated at December 31, 20X0.C.Operating expenses are overstated for the 12 months ended December 31, 20X0.D.Sales returns and allowance are overstated at December 31, 20X0.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue17.Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?A.Examine sales invoices.B.Inclusion of the information in the engagement letter.C.Examine correspondence.D.Examine any subsequent cash receipts.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue18.Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?A.Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables.B.Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash.C.Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.D.The failure to prepare shipping documents may lead to an understatement of inventory balances.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables19.A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?A.Cash receipts.B.Payroll.C.Purchases.D.Sales.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue20.Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?A.Examine cash receipts received after year-end.B.Confirm receivables.C.Examine dates of purchase orders.D.Foot the receivables lead schedule.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue21.Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?A.Accounts receivable divided by Cost of goods sold.B.Aging of accounts receivable.C.Cash Sales divided by Accounts receivableD.Year 2 accounts receivable compared to year one accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue22.For effective internal control, the billing function should not be performed by the:A.Sales department.B.Accounting department.C.Finance department.D.Information Processing department.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables23.Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?A.Footing the sales journal.B.Confirming accounts receivable.C.Tracing the total sales in the sales journal to the general ledger.D.Observation of the physical inventory count at year-end.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue24.An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by:A.Tracing sales invoices to shipping documents to tests the completeness of reported sales.B.Tracing shipping documents to sales invoices to test the occurrence of reported sales.C.Tracing sales invoices to shipping documents to test the occurrence of reported sales.D.Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue25.The confirmation of accounts receivable is most closely associated with:A.Business risk.B.Detection risk.C.Inherent risk.D.Relative risk.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue26.Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?A.A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year.B.Internal control activities over the recording of cash receipts have been improved since the end of the prior year.C.The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.D.The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue27.After the CPAs have selected particular accounts receivable for confirmation:A.As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail.B.It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures.C.All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.D.All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue28.Which of the following manipulations would understate receivables on the financial statements?A.Understatement of cash sales.B.Closing the sales journal prior to year-end.C.Closing the cash receipts journal prior to year-end.D.Underestimating the allowance for doubtful accounts.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue29.You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:A.The cash receipts journal was closed before year-end.B.The cash receipts journal was held open after year-end.C.There are many unrecorded liabilities.D.The sales journal was held open after year-end.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue30.An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:A.Collection of receivables.B.Purchase of merchandise inventory.C.Payment of accounts payable.D.Sale of long-term debt.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue31.Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?A.Merchandise received is not promptly reconciled to the outstanding purchase order file.B.Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.C.The write-off of receivables by personnel who receive cash permits the misappropriation of cash.D.Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue32.Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?A.Investigate confirmation exceptions for indication of amounts in dispute.B.Review accounts which have been written off as uncollectible prior to year-end.C.Investigate credit ratings for large accounts receivable.D.Discuss with the credit manager the current status of doubtful accounts.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue33.Which of the following is consistent with effective internal control over sales transactions?A.The accounting department prepares a shipping report authorizing the shipment of goods.B.The accounting department accounts for all receiving reports.C.The billing department accounts for all shipping documents.D.The accounts payable department annually approves the extension of credit to customers.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables34.Tracing recorded sales transactions to the bills of lading provides evidence about the:A.Completeness of sales transactions.B.Collectibility of sales transactions.C.Occurrence of sales transactions.D.Billing of all sales transactions.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue35.To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:A.Trace a sample of the bills of lading to sales invoices.B.Confirm a sample of accounts payable.C.Review the aging of accounts receivable.D.Trace a sample of recorded sales to shipping documents.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue36.Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?A.Reviewing an aging of accounts receivable.B.Examination of cash receipts subsequent to the balance sheet date.C.Confirming current (0-30 day) year-end accounts receivable.D.Reviewing credit files for selected account.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue37.Which of the following would indicate the need to use positive accounts receivable confirmation requests?A.A large population consisting of small balances.B.Good internal control over accounts receivable.C.Most accounts are with large reputable companies.D.A large number of accounts receivable are in dispute.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue38.Which of the following is not true about the confirmation of accounts receivable?A.Confirmation requests should bear the auditors' return address.B.Confirmation requests should be signed by the auditors.C.Confirmation requests should be mailed directly by the auditors.D.Confirmation requests should include a return envelope addressed to the office of the auditors.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue39.Which of the following is not true about the auditors' verification of notes receivable?A.The interest revenue on notes receivable is usually audited by independent computation.B.Inspecting the notes is sufficient evidence of existence of the notes.C.The auditors may evaluate the collectibility of notes by inspecting credit files.D.Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue40.To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:A.The sales journal.B.The billing clerk's file of sales orders.C.Duplicate copies of sales invoices.D.The shipping clerk's file of duplicate copies of bills of lading.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue41.Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?A.The positive form for small balances, and the negative form for large balances.B.The positive form used for large balances and the negative form for the small balances.C.The positive form used for trade receivables and the negative form for other receivables.D.The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue42.The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?A.A substantial number of accounts are in disputes.B.The combination of inherent risk and control risk is high.C.Client records include a large number of relatively small balances.D.The auditors believe that recipients of the requests are unlikely to give them consideration.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue43.When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:A.Subsequent collections are to be reviewed.B.Internal control over receivables is good.C.Negative confirmation requests are to be used.D.There is a simultaneous examination of cash and accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue44.It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:A.Examining subsequent receipts of year-end accounts receivable.B.Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date.C.Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed.D.Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue45.The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:A.Consider internal control over credit sales.B.Test the accuracy of recorded charge sales.C.Estimate credit losses.D.Verify the validity of the recorded receivables.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue46.Which of the following is not a primary objective of the auditors in the examination of accounts receivable?A.Determine the approximate realizable value.B.Consider the adequacy of internal control.C.Establish the existence of receivables.D.Determine the expected day of collection of each of the receivables.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue47.Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to:A.Increase the balance in the allowance for bad debts accounts.B.Review the going concern ramifications.C.Review the credit and collection policy.D.Expand tests of collectibility.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue48.Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?A.Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger.B.Posting to the general ledger and approval of additions and terminations relating to the payroll.C.Custody of unmailed signed checks and maintenance of expense subsidiary ledger.D.Collection of receipts on account and maintaining accounts receivable records.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Source: AICPATopic: Receivables49.Tracing copies of sales invoices to shipping documents will provide evidence that all:A.Shipments to customers were recorded as receivables.B.Billed sales were shipped.C.Debits to the subsidiary accounts receivable ledger are for sales shipped.D.Shipments to customers were billed.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue50.Which of the following is the best argument against the use of negative accounts receivable confirmation requests?A.The cost-per-response is excessively high.B.There is no way of knowing if the intended recipients received them.C.Recipients are likely to feel that in reality the confirmation is a subtle request for payment.D.The inference drawn from receiving no reply may not be correct.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue51.When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is:A.Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.B.High, and the individuals receiving the confirmation requests are likely to give them adequate consideration.C.High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.D.Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue52.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.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue53.The confirmation process may be performed using a(n):

A.Option AB.Option BC.Option CD.Option D

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue54.A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a:A.Test of a control.B.Substantive test.C.Cutoff test.D.Statistical test.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Source: AICPATopic: Receivables55.Which of the following is not one of the criteria for revenue recognition?A.Collectibility is certain.B.Delivery has occurred or services have been rendered.C.Evidence of an arrangement exists and is persuasive.D.A fixed or determinable price to buyer exists.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue56.Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except:A.It understates liabilities.B.It overstates revenuesC.It overstates net income.D.It overstates assets.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables57.In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?A.Fictitious revenuesB.Timing differencesC.Improper asset valuationsD.Improper disclosures

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-04 Use the understanding of the client and its environment to consider inherent risks (including fraud risks) related to receivables and revenue.Topic: Audit of Receivables and Revenue58.Which of the following revenue related transactions is not linked to the accounts indicated?A.Recognize revenues too early--accounts receivable and revenue.B.Understate allowance for doubtful accounts--bad debt expense, allowance for doubtful accounts.C.Don't write off uncollectible receivables--sales returns, sales discounts.D.Don't record discounts given to customers--cash, sales discounts, accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables59.The individual looking for guidance on revenue recognition is most likely to appropriately review:A.APB 99.B.SAB 104.C.ASR 44.D.B1 Document.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue60.An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:A.Obsolete inventory has not yet been reduced to fair market value.B.There was an improper cutoff of sales at the end of the year.C.An unusually large receivable was written off near the end of the year.D.The aging of accounts receivable was improperly performed in both years.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue61.Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?A.Fax responses.B.Oral responses obtained by the auditor through a telephone call.C.Written responses to negative confirmation requests.D.Written response to confirmations sent out without balances due.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue62.Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the:A.Completeness of recording of sales transactions.B.Occurrence of sales transactions.C.Billing of all sales transactions.D.Presentation of payables.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-02 Describe the auditors' objectives in the audit of receivables and revenue.Learning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and RevenueTopic: ReceivablesEssay Questions

63.The auditor determines that both of the following objectives will be part of the audit of Anthony Co. For each of the following audit objectives, select the substantive test that would most likely provide support for the objective. A substantive test may be used once, more than once, or not at all.

Selection List

A. Perform tests of subsequent cash receipts after the balance sheet date.B. Review and assess an aging schedule of accounts receivable.C. Compare recognized revenue to related industry statistics.D. Tour the storage facility for inventory to determine adequacy of security controls.E. Perform receiving cutoff procedures.F. Review payments to vendors subsequent to year-end.G. Read the financial statements (including notes) for completeness.

4. The existence of which of the following is most likely to increase audit risk in an audit client?

A. Anthony Co. was started as a local family business and has received additional funding over the years from several investors.B. A new CFO is redesigning Anthony Co.'s accounting policies and procedures.C. Anthony Co. consists of three core business operations: product sales in its retail store, product sales to food and specialty stores, and food services.D. Anthony Co. experienced significant sales growth during its history and continues to expand its product offerings and market reach.

5. Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Co.?

A. Credit terms were restricted on several large accounts during the current year.B. Operating expenses increased at a higher rate than sales revenue.C. Sales revenue increased at a higher rate than operating expenses.D. A smaller percentage of sales occurred during the last month of the year, as compared to the prior year.E. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

1. A. The requirement is to identify a substantive procedure that will help verify the existence of accounts receivable. Answer (a) is correct because the subsequent cash receipt will help establish both the existence of the accounts receivable and its valuation (in that it was collected).

2. B. The requirement is to identify a substantive procedure that will help verify the net realizable value of accounts receivable. Answer (b) is correct because aging of receivables will disclose accounts overdue and less likely to be collected.

3. G. The requirement is to identify a procedure that will provide assurance that all required receivable disclosures are presented. Answer (g) is correct because in reading the financial statements the auditors may identify omissions of required disclosures.

4. B. The requirement is to identify the factor that is most likely to increase audit risk (the risk that the auditor may unknowingly fail to modify the audit report on financial statements that are materially misstated). The second reply, redesign of the company's accounting policies and procedures, is most likely to increase audit risk because, until tested thoroughly through use, the new system may produce material misstatements that are not detected. The first reply is incorrect because starting as a local family business and receiving additional funding need not necessarily increase audit risk. The third answer is incorrect because the three core business operations themselves do not seem to indicate a high level of audit risk. The fourth reply is incorrect because the sales growth, while significant, seems reasonable.

5. E. The requirement is to identify the most likely explanation for an increase in the days' sales in accounts receivable (365/[sales/accounts receivable]). This occurs as follows:

( The denominator of the overall fraction (sales/accounts receivable) decreases since both the numerator and denominator increase by the same amount for uncollected sales. That is, increasing the numerator and denominator of a ratio that is greater than one by the same amount will decrease the ratio (e.g., picking arbitrary numbers, 3/2 = 1.5 ( 4/3 = 1.3).( When 365 is divided by a smaller denominator, days' sales in accounts receivable increases.

Explanation E is correct because it will result in an increase in the numerator at year-end. Explanation A is incorrect because more restricted credit terms are likely to decrease the number of days' sales in accounts receivable. Explanation B is incorrect because a change in the ratio of operating expenses to sales revenue does not affect days' sales in accounts receivable. Similarly explanation C is incorrect because an increase in sales revenue at a higher rate than operating expense does not affect days' sales in accounts receivable. Explanation D is incorrect because a smaller percentage of sales occurring in the last month will decrease the ratiothis is the opposite of the situation described by explanation E. Explanation F is incorrect because a simple increase in sales is expected prior to result in a pro rata increase in accounts receivable.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-04 Use the understanding of the client and its environment to consider inherent risks (including fraud risks) related to receivables and revenue.Learning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue64.As part of the fieldwork of an audit engagement, the senior on the audit obtained and documented an understanding of the company's internal control relating to accounts receivable and assessed control risk related to accounts receivable at the maximum level. Susan, the staff person assigned to the engagement, requested and obtained from the company an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, year 2, and sent positive confirmation requests to a sample of the company customers. Review Susan's comments on each of the following confirmations and determine the best conclusion and/or follow-up procedures for each item.Confirmation letters follow. Assume that all confirmations received have been appropriately signed, unless otherwise noted. For each customer in the table below, review the relevant confirmation letter and the comments at the bottom of each. Then double-click on the shaded space in the table, and select the procedure that should be followed to clear the exception, if one exists. Choose only one procedure per confirmation. A procedure may be used once, more than once, or not at all.

Selection list

A. Send a second request for confirmation to the customer.B. Exception noted; propose adjustment and request that the controller post it to the accounting records.C. Verify by examining subsequent cash collections and/or shipping documents.D. Verify that additional invoices noted on confirmation pertain to the subsequent year.E. Not an exception, no further audit work deemed necessary.F. Not an exception, no adjustment necessary. Determine the sufficiency of allowance for doubtful accounts.

Confirmation Letters

February 1, year 3Performance Marine Sales, Inc.1284 River RoadLouisville, Kentucky 40059Re: Balance at December 31, year 2 - $267,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3West Coast Ski Center, Inc.163 Tide AvenueMonterey, California 93940Re: Balance at December 31, year 2 - $414,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3Fish & Ski World, Inc.5660 Ocean Blvd.Port Arkansas, Texas 78373Re: Balance at December 31, year 2 - $72,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3NC Boating Center, Inc.110 Windward Blvd.Tierra Verde, Florida 33715Re: Balance at December 31, year 2 - $239,000Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience.Sincerely,

Susan's note to file:

February 1, year 3Desert Boats2135 W. Lane Ave.Tempe, Arizona 85287Re: Balance at December 31, year 2 - $60,000

Dear Sirs:As of December 31, year 2, our records indicate your balance with our company as the amount listed above. Please complete and sign the bottom portion of this letter and return the entire letter to our auditors, JS LLP, PO Box 100, Orlando, Florida 32806.A stamped, self-addressed envelope is enclosed for your convenience. Sincerely,

Susan's note to file:

Selection list

A. Send a second request for confirmation to the customer.B. Exception noted; propose adjustment and request that the controller post it to the accounting records.C. Verify by examining subsequent cash collections and/or shipping documents.D. Verify that additional invoices noted on confirmation pertain to the subsequent year.E. Not an exception, no further audit work deemed necessary.F. Not an exception, no adjustment necessary. Determine the sufficiency of allowance for doubtful accounts.

1. (B) Because the goods were shipped FOB shipping point on December 30, title passed when they were shipped. Accordingly, an adjustment should be proposed.2. (B) The transaction is acknowledged as being improperly reported. Thus, an adjustment should be proposed.3. (D) Because Susan's note does not reveal whether the client or the client's customer is correct, the proper follow-up procedure is to verify whether the additional invoices noted on the confirmation pertain to the subsequent year.4. (C) No evidence has been gathered here. Accordingly, the appropriate follow-up is to verify subsequent cash collections and/or shipping documents (which will indicate that goods were shipped to NC Boating Center, Inc.)5. (E) Cash in transit to the client at year-end is not recorded until received. Since Susan has already agreed this to the cash receipts journal no further procedures are necessary.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Source: AICPATopic: Audit of Receivables and Revenue65.Confirmation of accounts receivable is presumptively mandatory audit procedure. In performing this procedure, auditors use positive confirmation requests or negative confirmation requests or a combination of both.

a. Describe three conditions which should exist for the auditors to use the negative form of request.b. If a response is not received to an initial positive confirmation request, describe the action that should be taken by the auditors, including a discussion of alternative auditing procedures.

a. The conditions that should exist for the auditors to use negative confirmation requests include:

1. The combined assessed level of inherent and control risk is low,2. A large number of small balances, and3. Reason to believe the person receiving the confirmation will give it consideration.

b. If the initial response to a positive confirmation is not received, the auditors should:

1. Send a second request.2. Consider sending a third request or telephoning the customer.3. For significant nonrespondents perform alternative auditing procedures including:

( Examining subsequent cash receipts.( Vouching transactions making up the account balance to invoices and shipping documents.( Establishing the validity of the customer.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: UnderstandDifficulty: MediumLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substantive procedures; to address the risks.Topic: Audit of Receivables and Revenue66.Internal control over sales transactions is very important to the effectiveness of an organization.

a. For effective control over credit sales, describe four major functions that should be segregated.b. In addition to adequate segregation of duties, describe two other internal controls over sales transactions.

a. Functions that should be segregated to provide for effective internal control over sales transactions include (only four required):

( Authorization of sales.( Credit approval.( Issuance of merchandise from stock.( Shipping of merchandise.( Billing of accounts.( Maintenance of accounting records.

b. Other internal controls over sales transactions include (only two required):

( Verification of invoices.( Prenumbered shipping documents that are accounted for by the billing department.( Credit approval obtained prior to shipment of goods.( Mailing of monthly customer statements.( Control over written-off receivables.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the documents; records; and accounts that compose the revenue (sales) transactions cycle and the fundamental controls over receivables and revenue.Topic: Receivables67.Fraudulent sales are occasionally recorded at year-end as a means of overstating financial results. As examples, companies may engage in inappropriate bill and hold transactions or channel stuffing.

a. Describe two conditions that might indicate the recording of fraudulent sales.b. Define bill and hold transactions and describe the audit significance of such transactions.c. Define channel stuffing and describe the audit significance of this practice.

a. The following conditions may indicate the recording of fraudulent transactions:

( Unusually large increases in year-end sales to a single customer or a few.( Large increases in revenue and receivables along with increases in gross profit margins that are inconsistent with the client's experience or industry averages.( Inappropriate changes in accounting principles that result in an increase in recorded revenue.( Substantial sales returns following the balance sheet date.

b. Bill and hold transactions are sales that are billed but goods are not shipped. The audit significance is that stringent accounting requirements must be met for the transaction to qualify as sales.c. Channel stuffing involves providing large inducements to resellers to buy substantially more inventory than they can resell in a normal period of time. The audit significance is that an adequate allowance for sales returns must be established to appropriately account for the transactions.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementAICPA FN: Risk AnalysisBloom's: ApplyDifficulty: HardLearning Objective: 11-06 Assess the risks of material misstatement of receivables and revenue and design further audit procedures; including tests of controls and substant