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Exam 12: Audit of the Revenue Cycle

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Question 51

Multiple Choice

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For sales,the occurrence transaction-related audit objective affects the existence balance-related audit objective.For cash receipts,the occurrence transaction-related audit objective affects which balance-related audit objective?

A) existence
B) completeness
C) cutoff
D) valuation

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Question 52

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After the auditor has identified the key internal controls and weaknesses and assessed control risk,it is appropriate to decide whether

A) substantive tests will be increased sufficiently to justify the cost of performing tests of controls.
B) substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.
C) tests of controls will be increased sufficiently to justify the cost of performing substantive tests.
D) tests of controls will be reduced sufficiently to justify the cost of performing substantive tests.

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Question 53

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A)State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective.B)Describe three tests of controls commonly used to test the accuracy objective for sales.

As the quality of the enterprise risk management process declines,and the overall quality of internal controls declines,

The use of the negative (as opposed to the positive) form of receivables confirmation is indicated when

State the five specific balance-related audit objectives as applied to accounts receivable.

Your audit client is a large retail chain with its own credit card.It has annual sales of about $100 million.On December 31,there were approximately 40 000 open accounts with total receivables of approximately $18.5 million.Very few customer balances exceed $1000.The company's general office maintains the accounts receivable records.The large volume of transactions processed by the company has necessitated extensive segregation of duties and frequent balancing of data during processing.Accordingly,the company's general and system controls are considered to be very good.A complete record of each customer's account is stored on a relational database and includes the following information: Source transactions are store purchase invoices,payments,and adjustments.Daily,all the orders are received,entered into the computer,and processed against the customer master file.Each account is updated and automatically analyzed to determine whether the transactions just processed have created a condition that should be brought to the attention of the authorization or collection departments.Exception reports are automatically printed and forwarded to these groups. The company sends monthly statements to customers on a cyclical basis.About 2000 statements are mailed each billing day.As the accounts are updated,the day's transactions are accumulated and added to the starting control figure for each cycle.The new control figures are balanced with the sum of all the individual accounts in the cycle (accumulated as each account is processed).In addition,a detailed transaction and cycle control report is prepared,providing an audit trail in customer account number sequence. Required: Describe the audit procedures you would perform in your year-end audit work for this company's accounts receivable.For each audit test,state the relevant audit assertion(s).Be sure to include different types of tests as necessary (e.g.manual or computer-assisted audit techniques),and clearly identify those tests that can be completed using CAATs.

Which of the following circumstances would indicate that positive confirmations should be used on this engagement?

A common way to evaluate the adequacy of the bad debt allowance is to

Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?

Zhang Corporation returned $6000 of defective goods to Meli Inc.Meli has a strict policy of no cash refund.Meli should

At every audit engagement the auditor is required to consider that there could be significant risks of misstatement for revenue recognition.At ABC Ltd. ,the auditor has concluded that,yes,there are material risks of misstatement associated with revenue recognition.How does this affect the extent of testing for accounts receivable?

Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?

A document prepared for shipment of the goods sold using a trucking company is called the

Some companies use a lockbox system,whereby customers mail payments to a post office box address.The lockbox contents could be handled by a bank,another external organization,or the owner of the company.One of the advantages of using a lockbox is that it

A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period,overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

A)State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective.B)Describe three tests of controls commonly used to test the accuracy objective for cash receipts.

Invoices are prepared using a date equal to the shipping date.This control pertains to which transaction-related audit objective?

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale,cash payment received,credit memo issued,and the ending balance is the

Proper accounting requires that an account receivable must be written off by the client when