Which of the following risks is the confirmation of accounts receivable is most closely associated with?

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 cu