Question 1

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Accepted Answer

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. C

Question 2

Which of the following revenue related transactions is not linked to the accounts indicated?

Accepted Answer

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. C

Question 3

To obtain the best evidence regarding the completeness of recorded accounts receivable,the auditors:

Accepted Answer

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. A

Question 4

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?

Accepted Answer

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.

Question 5

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Accepted Answer

A)  Examine bills of lading.
B)  Physically examine items sold.
C)  Examine correspondence.
D)  Examine subsequent cash receipts.

Question 6

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Accepted Answer

A)  Completeness of sales transactions.
B)  Collectibility of sales transactions.
C)  Occurrence of sales transactions.
D)  Billing of all sales transactions.

Question 7

The confirmation of accounts receivable is most closely associated with:

Accepted Answer

A)  Business risk.
B)  Detection risk.
C)  Inherent risk.
D)  Relative risk.

Question 8

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Accepted Answer

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.

Question 9

Which of the following is not true about the auditors' verification of notes receivable?

Accepted Answer

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.

Question 10

Which of the following manipulations would understate receivables on the financial statements?

Accepted Answer

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.

Question 11

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?

Accepted Answer

A)  Accounts receivable are understated at December 31,20X0.
B)  Accounts receivable are overstated 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.

Question 12

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?

Accepted Answer

A)  A substantial number of accounts are in disputes.
B)  The combination of inherent risk and control risk is high.
C)  A low exception rate is expected.
D)  The auditors believe that recipients of the requests are unlikely to give them consideration.

Question 13

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

Accepted Answer

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.

Question 14

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

Accepted Answer

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.

Question 15

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:

Accepted Answer

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.

Question 16

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:

Accepted Answer

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.

Question 17

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

Accepted Answer

A)  Accounts receivable divided by Cost of goods sold.
B)  Aging of accounts receivable.
C)  Cash Sales divided by Accounts receivable.
D)  Year 2 accounts receivable compared to year one accounts receivable.

Question 18

If a company failed to record goods returned by customers near year end,the auditors would most likely discover this issue by:

Accepted Answer

A)  Reviewing records of sales returns.
B)  Confirming accounts receivable.
C)  Examining sales orders.
D)  Reviewing the accounts receivable subsidiary ledger.

Question 19

Complex sales contracts are most likely to result in higher risks regarding all of the following except:

Accepted Answer

A)  Identifying the contracting parties.
B)  Determining performance obligations.
C)  Determining when performance obligations are met.
D)  Allocating the transaction price to performance obligations.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 11: Accounts Receivable, notes Receivable, and Revenue