Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?Fictitious sales.Merchandise purchases being charged to selling and general expense.Unrecorded purchases.Unrecorded sales.

Revenues are normally considered to have been earned whenGoods have been shipped.The company has substantially accomplished what it must to be entitled to the benefits.All possibility of return has expired.The cash is collected.

When auditing the revenue and collection cycle, auditors normally select balances to confirm from theAccounts receivable listing.Sales journal.General ledger.Cash receipts listing.

When accounts receivable are confirmed at an interim date, auditors need not be concerned withSending negative confirmations to all customers as of the year-end date.Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence andexplanations for large variations.Obtaining a summary of receivables transactions from the interim date to the year-end date.Considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially.

Which of the following accounts is not normally part of the revenue and collection cycle?Sales.Purchases Returns and Allowances.Accounts Receivable.Cash.

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?Inherent risk was particularly high for accounts receivable.Dennis’s account was not yet due.Control risk was particularly low for accounts receivable.Dennis’s account was not with a related party.

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.Enables company personnel to determine the accuracy of each document.Enables personnel to determine the proper period recording of sales revenue and receivables.Enables personnel to determine the validity of recorded transactions.

The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?

OccurrenceAccuracyCompletenessCutoff

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?Sales returns.Miscellaneous income.Petty cash.Miscellaneous expense.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning theExistence of the balances confirmed.Collectability of the balances confirmed.Internal control over balances confirmed.Ownership of the balances confirmed.

Sales are normally recorded on the date of thePayment check.Sales invoice.Customer purchase order.Bill of lading.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish thatEntries in the accounts receivable subsidiary ledger were properly invoiced.All sales invoices have been properly posted to customer accounts.All sales have been recorded.Sales invoices represent bona fide sales.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them toSales invoices with shipping documents and customer sales invoices.Cash remittance lists and bank deposit slips.Credit files and reports.Records of accounts receivable write-offs.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned aboutImproper sales cutoff.Improper credit approvals.Unrecorded costs.Fictitious sales.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence thatRecorded sales were shipped.

Shipments to customers were recorded as sales.Shipments to customers were invoiced.Invoiced sales were shipped.

Which of the following would be the best protection for a company that wishes to prevent the “lapping” of trade accounts receivable?Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.Have customers send payments directly to the company’s depository bank.Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.Request that customer’s payment checks be made payable to the company and addressed to the treasurer.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following exceptDo nothing for immaterial balances.Examine shipping documents.Send a second request.Examine client correspondence files.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager’s representation?Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.Perform additional inquiries with sales personnel.Vouch vender invoices to payments made after year-end.Send confirmations asking customers about unit prices paid for product.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily toEstimate credit losses.Test the accuracy of recorded charge sales.Evaluate internal control over credit sales.Verify the existence of the recorded receivables.

An auditor is required to confirm accounts receivable if the accounts receivable balances areOlder than the prior year.Subject to valuation estimates.Material to the financial statements.Smaller than expected

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?“The balance does not reflect our sales discount for paying by January 5.”“We received this shipment on January 2.”

“This amount was paid on December 30.”“These goods were returned for credit on November 15.”

Which of the following internal control activities most likely would deter lapping of collections from customers?Separation of duties between receiving cash and posting the accounts receivable ledger.Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.Authorization of write-offs of uncollectable accounts by a supervisor independent of credit approval.Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

Write-offs of doubtful accounts should be approved byThe salesperson.The treasurer.The cashier.The credit manager.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client’s fax machine. Which of the following actions should the auditor take?Accept the confirmation and file it in the working papers.Accept the confirmation but verify the source and content through a telephone call to the respondent.Not accept the confirmation and treat it as an exception.Not accept the confirmation and select another customer’s balance to confirm

In the audit of accounts receivable, the most important emphasis should be on thePresentation and disclosure assertion.Existence assertion.Completeness assertion.Rights and obligations assertion.

Required:For each of these assertions, select the following audit procedure that is best suited for the audit plan. Select only one procedure for each audit objective. A procedure may be selected once, not at all, or more than once. (numbered 1–7)

1. Analyze the relationship of accounts receivable and sales and compare with relationships for preceding periods.

2. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period

3. Review the aged trial balance for significant past due accounts.4. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable

balances.5. Review loan agreements for indications of whether accounts receivable have been factored or

pledged.6. Review the accounts receivable trial balance for amounts due from officers and employees.7. Analyze unusual relationships between monthly accounts receivable and monthly accounts payable

balances.

     a. Accounts receivable represent all amounts owed to the client company at

the balance sheet date.   b. The client company has a legal right to all accounts receivable at the

balance sheet date.   c. Accounts receivable are stated at net realizable value.

  d. Accounts receivable are properly described and presented in the financial

statements.   

The document that generates recording of a sale is the(0.5pts)The customer order.

The shipping order.

The invoice.

The purchase order.

"Bill and hold" refers to an arrangement where(0.5pts)Sales are recorded but are not shipped.

Sales are shipped but are not recorded.

Sales are billed but not collected.

Inventory is held but not billed.

Custody of inventory is transferred to the shipping area upon authorization of(0.5pts)The customer order.

The shipping order.

The invoice.

The purchase order.

The sum of customers' unpaid balances that is compared to the general ledger balance comes from(0.5pts)A total of sales invoices.

2

5 and 4

3

6 and 4

A total of shipping orders.

The sales journal.

The accounts receivable trial balance.

To be recognized, revenues must also be realized or realizable and(0.5pts)Foreseeable.

Collected.

Earned.

Shipped.

The SEC requires all of the following for revenue to be recognized except(0.5pts)Cash is collected.

Persuasive evidence of an arrangement exists.

Delivery has occurred or services have been rendered.

The seller's price to the buyer is fixed or determinable.

The assertion that auditors will probably emphasize in the revenue and collection cycle is(0.5pts)Occurrence.

Completeness.

Accuracy.

Classification.