Question 1

When an auditor uses negative confirmations, several factors must be considered. What are those factors?

Accepted Answer

When negative confirmations are used, the auditor puts considerable emphasis on:
• the effectiveness of internal controls
• substantive tests of transactions
• analytical procedures as evidence of the fairness of accounts receivable, and
• assumes that the large majority of recipients will provide a conscientious reading and response to the confirmation request

Question 2

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

Accepted Answer

1. Decide on the appropriate criteria for cutoff
2. Evaluate whether the client has established adequate procedures to ensure a reasonable cutoff
3. Test whether the cutoff was correct

Question 3

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.

Accepted Answer

A) True 
 B)False  False

Question 4

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Accepted Answer

A) True 
 B)False

Question 5

Below are listed possible misstatements that could occur in the sales and collections cycle. Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. Overstatement of sales and accounts receivable
b. Uncollectible accounts receivable that have not been provided for
c. Overstatement of sales returns and allowances

Accepted Answer

a. compare gross margin percentage with

Question 6

The net realizable value of accounts receivable is equal to:

Accepted Answer

A)  gross accounts receivable less allowance for uncollectible accounts. 
B)  gross accounts receivable less bad debt expense. 
C)  gross accounts receivable less returns and allowances. 
D)  gross accounts receivable less sales discounts. 
A)  gross accounts receivable less allowance for uncollectible accounts. 
B)  gross accounts receivable less bad debt expense. 
C)  gross accounts receivable less returns and allowances. 
D)  gross accounts receivable less sales discounts.

Question 7

Describe how the auditor tests the accuracy objective for accounts receivable.

Accepted Answer

Confirmation of accounts selected from t

Question 8

A procedure to test for a cash receipts cutoff error is:

Accepted Answer

A)  reconciling the bank statement. 
B)  performing a four-column proof-of-cash. 
C)  observing the counting of cash at the balance sheet date. 
D)  tracing recorded cash receipts to bank deposits on the bank statement of a different period. 
A)  reconciling the bank statement. 
B)  performing a four-column proof-of-cash. 
C)  observing the counting of cash at the balance sheet date. 
D)  tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Question 9

When do most companies record sales returns and allowances?

Accepted Answer

A)  During the month in which the sale occurs. 
B)  During the accounting period in which the return occurs. 
C)  Whenever the customer contacts the company regarding the credit. 
D)  During the month after the sale occurs. 
A)  During the month in which the sale occurs. 
B)  During the accounting period in which the return occurs. 
C)  Whenever the customer contacts the company regarding the credit. 
D)  During the month after the sale occurs.

Question 10

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

Accepted Answer

A)  accuracy. 
B)  existence. 
C)  control. 
D)  completeness. 
A)  accuracy. 
B)  existence. 
C)  control. 
D)  completeness.

Question 11

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.

Accepted Answer

The primary advantage of negative confir

Question 12

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

Accepted Answer

A)  realizable value 
B)  existence 
C)  completeness 
D)  occurrence 
A)  realizable value 
B)  existence 
C)  completeness 
D)  occurrence

Question 13

When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?

Accepted Answer

A)  Send a second confirmation request. 
B)  Examine subsequent cash receipts to determine if the receivable has been paid. 
C)  Examine shipping documents to verify that the merchandise was shipped. 
D)  Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered. 
A)  Send a second confirmation request. 
B)  Examine subsequent cash receipts to determine if the receivable has been paid. 
C)  Examine shipping documents to verify that the merchandise was shipped. 
D)  Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered.

Question 14

Cutoff misstatements can occur for:

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 15

A type of positive confirmation known as a blank confirmation:

Accepted Answer

A)  requests the recipient to fill in the amount of the balance. 
B)  is considered less reliable than the regular positive confirmation. 
C)  generates as high a response rate as the regular positive confirmation form. 
D)  is used when the auditor is confirming several small balances. 
A)  requests the recipient to fill in the amount of the balance. 
B)  is considered less reliable than the regular positive confirmation. 
C)  generates as high a response rate as the regular positive confirmation form. 
D)  is used when the auditor is confirming several small balances.

Question 16

The understatement of sales and accounts receivable is best uncovered by:

Accepted Answer

A)  confirming receivables. 
B)  reviewing the aged trial balance. 
C)  test of transactions for shipments made but not recorded. 
D)  reconciling the accounts receivable general ledger account with the schedule of accounts receivable. 
A)  confirming receivables. 
B)  reviewing the aged trial balance. 
C)  test of transactions for shipments made but not recorded. 
D)  reconciling the accounts receivable general ledger account with the schedule of accounts receivable.

Question 17

You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

Accepted Answer

A)  before the merchandise was shipped. 
B)  at the time the merchandise was shipped. 
C)  several days subsequent to shipment. 
D)  at a time after the point at which title passed. 
A)  before the merchandise was shipped. 
B)  at the time the merchandise was shipped. 
C)  several days subsequent to shipment. 
D)  at a time after the point at which title passed.

Question 18

Match seven of the terms (a-k) with the definitions provided below (1-7):
a. Accounts receivable balance-related audit objectives
b. Aged trial balance
c. Alternative procedures
d. Blank confirmation form
e. Cutoff misstatements
f. Evidence planning worksheet
g. Negative confirmation
h. Positive confirmation
i. Realizable value of accounts receivable
j. Timing difference in an account receivable confirmation
k. Invoice confirmation
________ 1. The follow-up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists and is collectible.
________ 2. A letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount.
________ 3. Misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period.
________ 4. A form used to help the auditor decide whether planned detection risk for tests of details of balances should be low, medium, or high for each balance-related audit objective.
________ 5. A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance.
________ 6. A reported difference in a confirmation from a debtor that is determined to be a timing difference between the client's and debtor's records and therefore not a misstatement.
________ 7. A listing of the balances in the accounts receivable master file at the balance sheet date broken down according to the amount of time that has passed between the date of sale and the balance sheet date.

Accepted Answer

1. c
2. h

Question 19

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.

Accepted Answer

A) True 
 B)False

Question 20

Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement?

Accepted Answer

The three exceptions are:
1. Accounts re

Exam 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

When an auditor uses negative confirmations, several factors must be considered. What are those factors?

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

The net realizable value of accounts receivable is equal to:

Describe how the auditor tests the accuracy objective for accounts receivable.

A procedure to test for a cash receipts cutoff error is:

When do most companies record sales returns and allowances?

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?

Cutoff misstatements can occur for:

A type of positive confirmation known as a blank confirmation:

The understatement of sales and accounts receivable is best uncovered by:

You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.

Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement?

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Details and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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