To test the existence assertion for recorded receivables, an auditor would select a sample from the:

C. Accounts receivable subsidiary ledger.

D. Shipping documents (bills of lading) file.

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

B. Physically examine items sold.

D. Examine subsequent cash receipts.

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.

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.

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.

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

B. Inclusion of the information in the engagement letter.

D. Examine any subsequent cash receipts.

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

C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

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.

D. The failure to prepare shipping documents may lead to an understatement of inventory balances.

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.

C. Examine dates of purchase orders.

D. Foot the receivables lead schedule.

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

C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

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.

D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

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?

B. Review accounts which have been written off as uncollectible prior to year-end.

A. Investigate confirmation exceptions for indication of amounts in dispute.

C. Investigate credit ratings for large accounts receivable.

D. Discuss with the credit manager the current status of doubtful accounts.

Which of the following is consistent with effective internal control over sales transactions?

C. The billing department accounts for all shipping documents.

A. The accounting department prepares a shipping report authorizing the shipment of goods.

B. The accounting department accounts for all receiving reports.

D. The accounts payable department annually approves the extension of credit to customers.

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

C. Occurrence of sales transactions.

A. Completeness of sales transactions.

B. Collectibility of sales transactions.

D. Billing of all sales transactions.

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

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.

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

C. Confirming current (0-30 day) year-end accounts receivable.

A. Reviewing an aging of accounts receivable.

B. Examination of cash receipts subsequent to the balance sheet date.

D. Reviewing credit files for selected account.

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

D. A large number of accounts receivable are in dispute.

A. A large population consisting of small balances.

B. Good internal control over accounts receivable.

C. Most accounts are with large reputable companies.

Which of the following is not true about the confirmation of accounts receivable?

B. Confirmation requests should be signed by the auditors.

A. Confirmation requests should bear the auditors' return address.

C. Confirmation requests should be mailed directly by the auditors.

D. Confirmation requests should include a return envelope addressed to the office of the auditors.

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

B. Inspecting the notes is sufficient evidence of existence of the notes.

A. The interest revenue on notes receivable is usually audited by independent computation.

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.

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

D. The shipping clerk's file of duplicate copies of bills of lading.

B. The billing clerk's file of sales orders.

C. Duplicate copies of sales invoices.

A practical and effective audit procedure for the detection of lapping is:

B. Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.

A. Preparing an interbank transfer schedule.

C. Tracing recorded cash receipts to postings in customers' ledger cards.

Which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

B. Approval of all disbursements by an individual independent of cash receipts.

C. Monthly bank cutoff statements.

D. Prenumbered remittance advices.

Which of the following is not a control that generally is established over cash receipts?

B. To insure accurate posting, the accounts receivable clerk should post the customers' receipts from customers' checks.

A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel.

C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account.

D. To prevent theft of cash, receipts should be deposited daily.

Which of the following statements is not correct about materiality?

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.

c. Materiality judgments are made in light of surrounding circumstanced and necessarily involve both quantitative and qualitative judgments.

d. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.

Which of the following statements concerning materiality thresholds in incorrect?

c. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.

a. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors.

b. The smallest aggregate level of errors or fraud that could be considered material to any of the financial statements is referred to as a materiality threshold.

d. Aggregate materiality thresholds are a function of the auditor's preliminary judgment concerning audit risk.

Preliminary arrangements agreed to by the auditor and the audit client should be reduced to writing by the auditor. The best place to set forth these arrangements is in

a. A memorandum to be placed in the permanent section of the auditing working papers.

c. A client representation letter.

d. A confirmation letter attached to the constructive services letter.

Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of the engagement letters is to

b. Provide a written record of the agreement with the client as to the services to be provided

a. Remind management that the primary responsibility for the financial statements rests with management

c. Satisfy the requirements of the CPA’s liability for insurance policy

d. Provide a starting point for the auditor’s preparation of the preliminary audit program

When should an auditor obtain an engagement letter?

c. When a new client is accepted by the auditor

a. Whenever a prospective client offers to hire the audit firm

b. During the interim audit period, after the auditor has evaluated the client’s internal control and estimated the amount of time required for the audit

d. At the conclusion of the field work, just prior to signing the audit report

In an integrated audit, which must the auditor communicate in writing to management?

c. Material weaknesses, significant deficiencies and other control deficiencies.

b. Material weaknesses and significant deficiencies.

d. Material weaknesses, significant deficiencies, other control deficiencies, and all suspected and possible employee law violations.

ACY52 Substantive Test of Receivables and Sales Quiz

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ACY52 Substantive Test of Receivables and Sales Quiz

60 questions

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

Accounts receivable that are written-off should not be turned over to a collection agency.

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance foruncollectible accounts.

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

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

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.

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

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

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.

Material accounts receivable from related parties should be stated separately from other receivables.

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