Exam 9: Auditing the Revenue Cycle

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

Confirmations of receivables at an interim date When internal controls are strong,the auditor may decide to confirm receivables before year end.Roll-forward procedures are then used to obtain adequate evidence for the roll-forward period.Discuss why the auditor would want to confirm receivables before balance sheet date,the risks involved,and at least three of the roll-forward procedures that the auditor performs to gain assurance on the roll-forward period.

As required by auditing standards,auditors should ordinarily presume there is a risk of material misstatement caused by fraud relating to revenue recognition.

The revenue cycle considered by auditors includes the sales process but not collections.

Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable.

Negative confirmations are considered to be more persuasive than positive confirmations.

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives?

The revenue cycle involves the procedures in generating a sales order,shipping the products,recording the transaction,and collecting the receivable.

Homer and Moe,PC are auditing the financial statements of Lyoncraft,Inc.and decide to confirm a sample of accounts receivable.This test is performed by Homer and Moe primarily to substantiate which of the following assertions?

Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.

Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses.

A timing difference type of exception in the confirmation process may arise when goods are in transit at the confirmation date.

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?

When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high,the auditor is more likely to use negative confirmations.

Substantive tests of the revenue cycle typically do not provide evidence of which of the following?

Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.

The auditor should be alert to the risk of material misstatements when cash flows from operations are negative and net income and revenues have increased.

Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons?

Exceptions found in the confirmation of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.