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Terms in this set (39)
Confirmation, which is a specific type of inquiry, is the process of obtaining a representation of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances provides primary evidence are
A. Completeness and Valuation
B. Rights and Obligation and Existence
C. Valuation and Rights and Obligations
D. Existence and Completeness
When designing the audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
The negative request form of accounts receivable confirmation may be used when the
Combined Assessed Level of Inherent and Control Risk is _____
Number of Small Balances is _____
Consideration by the Recipient is _____
A. Low, Many, Likely
B. Low, Few, Unlikely
C. High, Few, Likely
D. High, Many, Likely
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year-end
B. Intensify the study of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping records documenting the merchandise sold to the debtors
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
A. Inquire as to management's reasons for the refusal, and seek audit evidence as to their validity and reasonableness
B. Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures
C. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence
D. All of these
Which of the following pairs of accounts would an auditor most likely analyze on the same working paper?
A. Notes receivable and interest income
B. Accrued interest receivable and accrued interest payable
C. Notes payable and notes receivable
D. Interest Income and interest expense
Which of the following may be considered to be a primary objective of the auditor in the examination of accounts receivable?
A. Determine the approximate time of collectibility of receivables
B. Determine the relationship of receivables to sales
C. Determine the reasonableness of the sales figure
D. Establish validity and collectibility of receivables
Which of the following is not a procedure used by an auditor in the examination of accounts receivable?
D. Physical count and inspection
In determining validity of accounts receivable, which of the following would an auditor consider most reliable?
A. Direct telephone communication between auditor and debtor
B. Confirmation replies received directly from customers
C. Credits to accounts receivable from the cash receipts book after the close of business at year end
D. Documentary evidence that supports the accounts receivable balance
Which of the following forms of evidence represents the most competent evidence that a receivable actually exists?
A. A positive confirmation
B. A sales invoice
C. A receiving report
D. A bill of lading
Which of the following audit objectives is not served by confirming customers accounts receivable?
A. Sales and accounts receivable cutoff
B. Completeness of customers represented in the accounts receivable trial balance
C. Valuation of accounts receivable as of period end
D. Existence of customers represented in the accounts receivable trial balance
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
A. Pledging of the receivables is probable
B. No reply to a negative confirmation request is received
C. No reply to a positive confirmation request is received
D. Collectibility of the receivables is in doubt
The auditor should use positive confirmation of accounts receivable
A. When internal controls over the receivables process are believed to be strong
B. When the possibility of disputes in the accounts greater than usual
C. For individual account balances that are immaterial in amount
D. When variables estimation sampling techniques are not used
The negative form of accounts receivable confirmation request is particularly useful except when
A. Individual account balances are relatively large
B. Internal control surrounding accounts receivables is considered to be effective
C. A large number of small balances are involved
D. The auditor has reason to believe the persons receiving the request are likely to give them consideration
Which of the following statements is correct concerning the use of negative confirmation requests?
A. Negative confirmation requests are effective when the detection risk is low
B. Negative confirmation requests are effective when understatements of account balances are suspected
C. Unreturned negatuve confirmation requests rarely provide significant explicit evidence
D. Unreturned negative confirmation requests indicate that alternative procedures are necessary
An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
C. Existence and Occurrence
D. Rights and Obligations
Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?
A. Confirm a sample of recorded receivables by direct communication with the debtors
B. Observe the client's distribution by payroll checks
C. Compare a sample of shipping documents to related sales invoices
D. Review standard bank confirmations for indications of kiting
An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?
A. Sales invoices represent bona fide sales
B. Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices
C. All sales invoices have been recorded
D. All sales invoices have been properly posted to customer accounts
Tracing bills of lading to sales invoices provides evidence that
A. Shipments to customers were recorded as sales
B. Shipments to customers were invoiced
C. Recorded sales were shipped
D. Invoiced sales were shipped
When the objective of the auditor is to evaluate the appropriateness of adjustments to sales, the best available evidence would normally be
A. Documentary evidence obtained by inspecting documents supporting entries to adjustment accounts.
B. Oral evidence obtained by discussing adjustment-related procedures with controller personnel
C. Analytical evidence obtained by comparing sales adjustments to gross sales for a period of time
D. Physical evidence obtained by inspection of goods returned for credit
Which source document should an auditor use to verify the correct sales date for an item sold FOB shipping point?
A. Customer's purchase order
B. Customer's payment document
C. Carrier's bill of lading
D. Sales invoice
An auditor would primarily rely upon which type of evidential matter when evaluating the collectibility of accounts receivable?
A. Negative Confirmation
B. Positive Confirmation
C. Management's representations
D. Aged account's receivable listing
An aged trial balance of accounts receivable is usually used by the auditor to
A. Evaluate the results of compliance tests
B. Evaluate the provision for bad debt expense
C. Verify the validity of recorded receivables
D. Ensure that all accounts are promptly credited
Which account balance is most likely to be misstated if an aging of accounts receivable is not performed?
A. Accounts receivable
B. Allowance for bad debts
C. Sales revenue
D. Sales return and allowances
When auditing the allowance for uncollectible accounts, the least reliance should be placed on which of the following?
A. Ratios that show the past relationship of the allowance to net credit sales
B. Collection experience of the client's collection agency
C. The credit manager's opinion
D. An aging of past due accounts
Which of the following analytical audit findings would most likely indicate a possible problem?
A. A material increase in the acid test ratio
B. A material increase in inventory turnover
C. A material decrease in the receivables turnover
D. A material decrease days sales outstanding
An auditor's preliminary analysis of accounts receivable revealed the following turnover rates
Year 3 - 4.3
Year 2 - 6.2
Year 1 - 7.3
Which of the following is the most likely cause of the decrease in accounts receivable turnover?
A. Increase in the cash discount offered
B. Increased in cash sales
C. Liberalization of credit policy
D. Shortening of due-date terms
During a positive confirmation of accounts receivable as of the end of the reporting period, approximately 95% of the confirmation letters returned, indicated that the customer owed a smaller balance than the amount for confirmation. This might be explained by the fact that
A. The sales journal was closed prior to year-end
B. The sales journal was held open after year-end
C. There is a large number of unrecorded sales
D. The cash receipts journal was held open after year-end
The retention of cash receipts without an entry being made in the books until a subsequent cash receipt is received from which the cashier pays the preceding amount retained.
C. Cash shorting
Lapping may most likely be detected by
A. Careful comparison of the detailed entries on remittance lists and duplicate deposit slips with the cash receipts book
B. Surprise count of cash on hand
C. Scrutiny of the cutoff bank balance
D. A review of sales discounts
An auditor who wishes to substantiate the gross balance of the account "Trade Notes Receivable" is considering the advisability of performing the four procedures listed below. Which pair of procedures is best suited to this objective?
I. Age of receivables
II. Confirm the notes with the markers
III. Inspect the notes
IV. Trace a sample of postings from the sales journal to the notes receivable ledger
A. I and III
B. II and III
C. I and IV
D. II and IV
Which of the following audit procedures provides the best evidence about the collectibility of notes receivable?
A. Examination of cash receipts records to determine promptness of interest and principal payments
B. Reconciliation of the detail of notes receivable and the provision for uncollectible amounts to the general ledger control
C. Confirmation of the note receivable balances with the debtors
D. Examination of notes for appropriate debtors signature
Which of the following statements regarding the audit of negotiable notes receivable is not correct?
A. Materiality of the amount involved is a factor considered when selecting the accounts to be confirmed
B. The auditor should confirm all notes receivable as of the end of the reporting period
C. Physical inspection of a note by the auditor does not provide conclusive evidence
D. Notes receivable discounted with recourse need to be confirmed
A logical substantive test for accrued interest receivable would be to
A. Verify the cost, carrying value, and market value of notes receivable
B. Verify the interest income by a calculation based on the face amount of notes and the nominal interest rate
C. Recalculate interest earned and compare it to the amounts received
D. Compare the interest income with published interest investment records
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the management's assertion of
A. Rights and obligations
D. Valuation and allocation
Tracing shipping documents to prenumbered sales invoices provides evidence that
A. No duplicate shipments or billings occured
B. Shipments to customers were properly invoiced
C. All goods ordered by customers were shipped
D. All prenumbered sales invoices were accounted for
In evaluating the adequacy of the allowance for credit loss, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of
B. Valuation and Allocation
D. Rights and Obligations
Which of the following most likely would give the most assurance concerning the valuation and allocation assertions of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents
B. Comparing receivable turnover ratios with industry statistics for reasonableness
C. Inquiring about receivables pledged under loan agreements
D. Assessing the allowance for credit loss for reasonableness
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertion about
C. Rights and Obligations
D. Valuation and Allocation
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