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Which of the following processes are included in the revenue cycle?
a. Shipping products to customers.
b. Sending disbursements to suppliers.
c. Issuance of capital stock.
d. Preparation of a time card.

a. Shipping products to customers.

Which of the following is the best example of the control objective in the revenue cycle that all transactions are recorded accurately?
a. Sales are recorded at the invoice price expected to be collected from customers.
b. Sales orders have sequential numbering.
c. Recorded sales transactions are evidenced by valid invoices and shipping documents.
d. Credits to customer accounts are classified as liabilities.

c. Recorded sales transactions are evidenced by valid invoices and shipping documents.

The relationship between the sales cycle and an inventory system can best be noted in which of the following examples?
a. Credit is established prior to completion of a sales order.
b. Invoices are sent to customers only after shipment is evidenced.
c. Availability of products ordered are verified prior to processing a sale.
d. Billing information is added to the database for new customers.

c. Availability of products ordered are verified prior to processing a sale.

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives?
a. To determine revenue recognition policies.
b. To ensure customer satisfaction.
c. To prevent lapping by the accounts receivable department.
d. To ensure the realization of receivables.

d. To ensure the realization of receivables.

Sales transactions should be documented at initiation in order to accomplish which of the following objectives?
a. To provide the customer a copy of the transaction.
b. To provide evidence of authorization and recording.
c. To offer credit to customers.
d. To generate back orders.

b. To provide evidence of authorization and recording.

The significance of the bill of lading is to provide which of the following?
a. The warehouse personnel with the product that must be shipped to customers.
b. Invoices to customers for proper collection.
c. A credit application for customer approval.
d. Evidence of title transfer of goods to customers.

a. The warehouse personnel with the product that must be shipped to customers.

The risk of material misstatement due to fraud relating to revenue recognition should be
a. approached in a manner that is identical to control risk assessment.
b. given lower priority to the risk of embezzlement.
c. ordinarily presumed by the auditor.
d. assumed to have been considered by the FASB.

c. ordinarily presumed by the auditor.

A method used by companies to fraudulently inflate revenues includes which of the following?
a. Use of hidden "side letters" giving the customer an irrevocable right to return the product.
b. Recording of fictitious sales.
c. Shipment of product not ordered by customers.
d. All of the above.

d. All of the above.

Which of the following evidences delivery of product to customers sufficient for company recording as revenues?
a. A check received from the customer.
b. An agreement to purchase product signed by the customer.
c. A pick ticket in the warehouse.
d. A bill of lading and tracking number with the shipper.

d. A bill of lading and tracking number with the shipper.

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?
a. The cash is realized on the sale of the product.
b. A price is discussed based upon the customer's resale of the product.
c. The customer is given the option to return the product at any time.
d. The product is adequately delivered to the customer.

d. The product is adequately delivered to the customer.

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?
a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.
b. Gross margin is equivalent in the current period to previous periods and is below that of the industry.
c. Sales are higher in the month preceding each quarter end.
d. The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following?
a. Trend analysis.
b. Ratio analysis.
c. Reasonableness testing.
d. Non-statistical sampling.

b. Ratio analysis.

Hardman and Jennings, LLP, an audit firm, compares bad debt expense of a client in the current period to bad debt recorded for the past three periods. Hardman and Jennings is performing which type of analysis?
a. Trend.
b. Ratio.
c. Critical.

a. Trend.

Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores. Lithgow and Harris relates annual revenue by sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing?
a. Ratio analysis.
b. Critical analysis.
c. Reasonableness tests.
d. Non-statistical analysis.

c. Reasonableness tests.

In an audit of financial statements, the risk of the high rate of return of products sold includes relates to which of the following?
a. Sales that are recorded improperly.
b. An estimate of accrued returns that reduces net income.
c. A reduction of net sales for an increase to the sales returns and allowance account.
d. Consignment goods that are returned and forwarded to third parties.

a. Sales that are recorded improperly.

The major risk associated with receivables is related to which of the following?
a. They may be sold to a bank with recourse.
b. They may be recorded as long-term when in fact they will be realized in the current period.
c. They will not be realized for the entire amount due.
d. They are pledged as collateral as disclosed in the footnotes to financial statements.

c. They will not be realized for the entire amount due.

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?
a. Electronic authorization prior to posting.
b. Use of sequentially numbered sales documents.
c. Random statements to customers.
d. Review of transactions by upper management or the board.

d. Review of transactions by upper management or the board.

A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?
a. Use of prenumbered shipping, invoice and sales documents.
b. Use of prenumbered statements, inventory lists and credit memos.
c. Reconciliation of invoices with customer statements.
d. Use of pre-authorized price lists.

a. Use of prenumbered shipping, invoice and sales documents.

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total. This process is performed for which purpose?
a. Drafting financial statements.
b. Monitoring revenue transactions.
c. Providing management reports to the controller.
d. Providing suggestions for operational improvement.

b. Monitoring revenue transactions.

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?
a. Substantiate cutoff and the occurrence of net sales transactions.
b. Test the sufficiency of cash balances to cover refunds.
c. Monitor customer satisfaction for disclosure.
d. Assess the nature of procedures that will be performed for the next period's audit.

a. Substantiate cutoff and the occurrence of net sales transactions.

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate which assertion?
a. Existence of receivables.
b. Cutoff of receivables.
c. Valuation of receivables.
d. Rights to receivables.

c. Valuation of receivables.

What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate?
a. Accounts receivable aging schedule.
b. Copies of checks received from customers.
c. Confirmations returned without exception.
d. Stock prices of customer companies.

a. Accounts receivable aging schedule.

23. Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks?
a. Examining sales contracts and inquiry of management.
b. Confirming sales with customers.
c. Discussing the transactions with qualified members of the Financial Accounting Standards Board.
d. Comparing shipping documents with invoices.

b. Confirming sales with customers.

. The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate which assertion?
a. Cutoff.
b. Completeness.
c. Legality.
d. Occurrence.

d. Occurrence.

In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test which of the following assertions?
a. Existence of sales.
b. Presentation and disclosure of receivables.
c. Cutoff of sales transactions.
d. Completeness of receivables.

v

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following?
a. Shipping documents and tracing them to the sales journal.
b. Accounts receivable and tracing them to cash receipts.
c. Recorded sales transactions and tracing them to the general ledger.
d. Inventory records and tracing them to the shipping documents.

d. Inventory records and tracing them to the shipping documents.

Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions?
a. Existence of related party transactions.
b. Existence of accounts receivable.
c. Obligation of debt.
d. Cutoff of the allowance for bad debt.

b. Existence of accounts receivable.

The aged accounts receivable report is utilized by the auditor to accomplish which of the following?
a. Encourage the client to collect on receivables that are long past due.
b. Select the type of confirmations that will be sent to banks.
c. Assess the adequacy of the allowance for doubtful accounts.
d. Identify debits in the receivables balance that should be reclassified to payables.

c. Assess the adequacy of the allowance for doubtful accounts.

According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations?
a. On every audit engagement.
b. If the client agrees in writing to the procedure.
c. If the balance is material.
d. If environmental risk is low.

a. On every audit engagement

The primary difference between positive and negative confirmations used in the audit of accounts receivable is which of the following?
a. The mode of response.
b. The amount of information included.
c. The control of the confirmation process by the auditor.
d. The level of assurance provided.

a. The mode of response.

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?
a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle.
b. A utility company with control risk over the revenue cycle assessed high.
c. A mortgage banking company with excellent control over the purchasing cycle.
d. A cable company with control risk over the revenue cycle assessed low.

d. A cable company with control risk over the revenue cycle assessed low.

Accounts receivable confirmations usually provide strong evidence about which of the following?
a. The existence of receivables.
b. The completeness of receivables.
c. The presentation and disclosure of receivables.
d. The obligations of receivables.

a. The existence of receivables.

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms?
a. Direct confirmations.
b. Indirect confirmations.
c. Positive confirmations.
d. Negative confirmations.

c. Positive confirmations.

Which one of the following procedures would be considered improper by the auditor in the process of confirming receivables?
a. The auditor allows the client's staff to prepare the confirmation letters after the auditor has chosen the items to be confirmed.
b. The auditor allows the client to sign the confirmations after they are prepared.
c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters.
d. The auditor asks the addressee to return the confirmation to the audit firm's office.

c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters

An auditor's examination of the sales account using a cut-off test would most likely detect which of the following?
a. Kiting.
b. Sales that should be deferred.
c. Lapping of accounts receivable.
d. Sales recorded in the wrong period.

d. Sales recorded in the wrong period.

Alternative procedures that would provide evidence of the existence of receivables would include which of the following?
a. Physical observation of customer facilities.
b. Review of subsequent collections.
c. Analysis of the aged trial balance.
d. A confirmation to the client management for customer accounts.

b. Review of subsequent collections.

Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons?
a. Confirmations are selected based upon zip codes.
b. A P.O. Box is more reliable than a street address.
c. Confirmations should be sent only to business addresses and not residential.
d. The address may be routed to the client for retrieval and fraudulent signing.

d. The address may be routed to the client for retrieval and fraudulent signing.

Unreturned positive confirmations for accounts receivable warrant which of the following actions?
a. Replacing the sample selection with a new customer.
b. Sending second requests and possibly performing subsequent procedures.
c. The projection of larger misstatements to the population.
d. Requesting that the client send additional audit correspondence to customers.

a. Replacing the sample selection with a new customer.

An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions?
a. Inquiry of management.
b. Tracing source documents to recorded amounts.
c. Review of subsequent collections on account by the client.
d. Providing an estimate of the allowance for doubtful accounts to be recorded by the client.

b. Tracing source documents to recorded amounts.

A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following?
a. Customer collections that are over 90 days past due.
b. Credit entries in customer accounts receivable for authorized writeoffs.
c. Recurring entries in the sales journal.
d. Altered shipping documents and invoices.

d. Altered shipping documents and invoices.

In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following?
a. All material accounting estimates have been developed properly.
b. The estimates are reasonable.
c. The estimates are presented in accordance with GAAP.
d. All of the above are true.

d. All of the above are true.

The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following reasons?
a. It is an accounting estimate based upon judgment.
b. GAAP is not clear on the calculation of the allowance.
c. It is merely a reserve that is reversed by the client as income is needed for profitable results.
d. The precision is determined by the results of confirmation responses.

a. It is an accounting estimate based upon judgment.

To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely perform which of the following procedures?
a. Examine subsequent collections.
b. Test a sample of transactions to the general ledger.
c. Review loan agreements and board of directors' meeting minutes.
d. Derive an independent estimate of the allowance and compare it to pledged assets.

c. Review loan agreements and board of directors' meeting minutes.

Which of the following criteria must be met in order to recognize revenue in the current accounting period?
a. Delivery has occurred or the services have been rendered.
b. Price is fixed or determinable.
c. Collectibility if reasonably assured.
d. All of the above.

d. All of the above.

Management has been found involved in many fraudulent schemes; a common one is "channel stuffing." What does "channel stuffing" involve?
a. Overly complex transactions.
b. Growth through stock acquisitions.
c. Shipment of goods not ordered.
d. Management compensation schemes.

c. Shipment of goods not ordered.

Which of the following is not a form of ratio analysis?
a. Turnover of receivables.
b. Monthly sales analysis compared with past years.
c. Gross margin analysis.
d. Sales in last month to total sales.

b. Monthly sales analysis compared with past years.

Sources of audit planning information may come from which of the following?
a. Knowledge of client's business and industry.
b. Assessment of risk of material misstatement.
c. Results of analytical procedures.
d. All of the above.

d. All of the above.

Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales?
a. Trace bill of lading to sales invoice and sales journal.
b. Confirm balances of unpaid invoices with customers.
c. Examine subsequent collection.
d. Scan sales journal for duplicate entries.

b. Confirm balances of unpaid invoices with customers.

Which of the following audit procedures does not address the rights, presentation and disclosure assertion for pledged, discounted, assigned, and related-party accounts receivable?
a. Review work performed in other audit areas.
b. Inquire of management.
c. Review adequacy of allowance for doubtful accounts.
d. Review loan agreements.

...

A sample of positive confirmations is mailed for material accounts receivable balances. Frequently there is a lack of response. Which of the following is not an acceptable alternative procedure?
a. Subsequent collection.
b. Inquiry of management.
c. Mailing second and third confirmations.
d. Examination of supporting documents.

c. Mailing second and third confirmations.

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