Exam 11: Accounts Receivable, notes Receivable, and Revenue

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

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

For effective internal control,the billing function should not be performed by the:

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

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.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions.The auditor therefore develops general and specific procedures to apply to the accounts and transactions.In a particular case,s/he might do this by:

1-3.The auditor determines that both of the following objectives will be part of the audit of Anthony Company.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. Substantive Tests: - Perform tests of subsequent cash receipts after the balance sheet date. - Review and assess an aging schedule of accounts receivable. - Read the financial statements (including notes)for completeness. Objective Substantive Tests 1 Verify existence of accountsreceivable. 2 Determine that accounts receivable are valued at their net realizable value. 3 Determine that proper receivable disclosures are presented. 4.The existence of which of the following is most likely to increase audit risk in an audit client? Anthony Company was started as a local family business and has received additional funding over the years from several investors. A new CFO is redesigning Anthony's accounting policies and procedures. Anthony Company consists of three core business operations: product sales in its retail store,product sales to food and specialty stores,and food services. The company 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 Company? Credit terms were restricted on several large accounts during the current year. Operating expenses increased at a higher rate than sales revenue. Sales revenue increased at a higher rate than operating expenses. A smaller percentage of sales occurred during the last month of the year,as compared to the prior year. A larger percentage of sales occurred during the last month of the year,as compared to the prior year.

A computer software firm allows its sales team to make material modifications to standard software contracts.What should be the auditors' primary concern in this situation?

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:

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. Required 1 Confirmation Letter #1 February 1,year 3 Performance Marine Sales,Inc. 1284 River Road Louisville,Kentucky 40059 Re: Balance at December 31,year 2 - $267,000 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, Aquatic Jet Products,Inc. The above balance is Correct X Incorrect (show amount) \ 325,000 If incorrect,please provide information that could help to reconcile your account. Signature Title Date Response: We placed an order for $58,000 on December 26,year 2. Susan's note to file: Per discussion with the controller,the order for $58,000 was shipped FOB shipping point on December 30,year 2,and was received by the customer on January 3,year 3.Therefore,no entry has been made to record the sale in year 2. Required 2 Confirmation Letter #2 February 1,year 3 West Coast Ski Center,Inc. 163 Tide Avenue Monterey,California 93940 Re: Balance at December 31,year 2 - $414,000 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, Aquatic Jet Products,Inc. The above balance is Correct Incorrect (show amount) \ 320,000 If incorrect,please provide information that could help to reconcile your account. Response: We made a payment of $94,000 on December 12,year 2. Signature Title Date Susan's note to file: Per discussion with the controller,the company received the payment of $94,000 on December 15,year 2,and posted it to "Other Income." Required 3 Confirmation Letter #3 February 1,year 3 Fish & Ski World,Inc. 5660 Ocean Blvd. Port Arkansas,Texas 78373 Re: Balance at December 31,year 2 - $72,000 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, Aquatic Jet Products,Inc. The above balance is Correct Incorrect (show amount) \ 613,000 Invoice \#4212 \ 72,000 Invoice \#4593 \ 66,000 Invoice \#4738 \ 25,000 Signature Title Date Susan's note to file: Invoices #4593 and 4738 are not on the A/R aging report at December 31,year 2. Required 4 Confirmation Letter #4 February 1,year 3 NC Boating Center,Inc. 110 Windward Blvd. Tierra Verde,Florida 33715 Re: Balance at December 31,year 2 - $239,000 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, Aquatic Jet Products,Inc. The above balance is Correct Incorrect (show amount) hline If incorrect,please provide information that could help to reconcile your account. Response: We cannot determine the balance due at December 31,year 2. Signature Title Date Susan's note to file: No amount was confirmed on the response letter. Required 5 Confirmation Letter #5 February 1,year 3 Desert Boats 2135 W.Lane Ave. Tempe,Arizona 85287 Re: 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, Aquatic Jet Products,Inc. The above balance is Correct Incorrect (show amount) hline If incorrect,please provide information that could help to reconcile your account. Response: We paid the entire amount on December 30,year 2.So the balance is completely incorrect. Signature Title Date Susan's note to file: I found cash recorded as received in the cash receipts journal on January 3,year 3.

The department approving a sales transaction should be the billing department.

Confirmation of accounts receivable is presumptively a 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.