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Flashcards in 11.4 Deck (19):
1

For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?

Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.

The accounts receivable turnover equals sales divided by average gross receivables. Thus, it equals 10.0 ($1,000,000 ÷ $100,000) and 6.7 ($2,000,000 ÷ $300,000) for the prior year and current year, respectively. The ratio of allowance for uncollectible accounts receivable to gross accounts receivable is .30 ($30,000 ÷ $100,000) for the prior year and .17 ($50,000 ÷ $300,000) for the current year. The gross accounts receivable tripled in the second year, yet the allowance for uncollectible accounts receivable increased by only 67%. This could be an indication that the allowance for uncollectible accounts receivable is understated.

2

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents’ exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

One of the cashiers has been covering a personal embezzlement by lapping.

Lapping is the theft of a cash payment from one customer concealed by crediting that customer’s account when a second customer makes a payment. When lapping exists at the balance sheet date, the confirmation of customer balances will probably detect the fraud because the customers’ and entity’s records of lapped accounts will differ.

3

Which of the following might be detected by an auditor’s review of the client’s sales cutoff?

Inflated sales for the year.

Sales cutoff tests are designed to detect the client’s manipulation of sales. By examining recorded sales for several days before and after the balance sheet date and comparing them with sales invoices and shipping documents, the auditor may detect the recording of a sale in a period other than that in which title passed.

4

The standard AICPA form to financial institutions requesting information on direct liabilities on loans asks for the following information

The principal amount paid:
Description of collateral:
Date through which interest is paid:

No
Yes
Yes

The principal amount paid on a direct liability is not listed on the Standard Form to Confirm Account Balance Information with Financial Institutions. The form confirms account number/description, balance, due date, interest rate, date through which interest is paid, and a description of collateral.

5

A large university has relatively ineffective internal control. The university’s auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by

Comparing business office revenue records with registrar’s office records of students enrolled.

To be assured that all tuition revenue is being recorded, the auditor must perform substantive procedures, which are tests of details and substantive analytical procedures to detect material misstatements in an account balance, transaction class, or disclosure component. Comparing business office revenue records with registrar’s office records of students enrolled provides analytical evidence based on independently generated records.

6

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.

The information presented on a statement of cash flows is taken from the income statement and balance sheet. Indeed, a reconciliation of net income and net operating cash flow is required to be presented. Thus, reconciliation of amounts in the statement of cash flows with other financial statements’ balances and amounts is an important procedure in the audit of the statement of cash flows.

7

A company issued bonds for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor’s best course of action is to

Trace the cash received from the issuance to the accounting records.

The auditor’s best course of action is to trace the cash received from the issuance of the bonds into the accounting records to gather evidence that the transaction was recorded in the proper amounts in the appropriate accounts.

8

An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about

Valuation and allocation.

Assertions about valuation and allocation address whether (1) assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and (2) resulting adjustments are properly recorded. Determining the net realizable value of accounts receivable includes assessing whether the client’s allowance for uncollectibility is reasonable. Reviewing the credit ratings of delinquent customers provides evidence for that purpose.

9

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the

Accounting records with source documents.

Overstatements of sales likely result from entries with no supporting documentation. The proper direction of testing is to sample entries in the sales account and vouch them to the shipping documents. The source documents represent the valid sales.

10

Many of the Granada Corporation’s convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation’s statement of cash flows and related disclosures to ascertain that they show

The issuance of the stock and reduction in convertible debt.

Information about noncash financing and investing activities must be reported in related disclosures but not on the face of the statement of cash flows. Exclusion of such transactions from the statement avoids complicating it and emphasizes the entity’s cash receipts and payments. The issuance of stock and the reduction of convertible debt should therefore be disclosed in a related but separate schedule. All financing (and investing) activities during the period should be reported, including those that do not directly affect cash.

11

The most effective audit procedure for determining the collectibility of an account receivable is the

Review of the subsequent cash collections.

Collectibility pertains to the assertion of valuation. It is the principal issue with regard to the adequacy of the allowance for doubtful accounts. The best way to determine collectibility is to learn whether the receivable was subsequently collected. A confirmation provides evidence that a contract exists and that the debtor acknowledges the debt, but the subsequent collection of the receivable is the only means of gaining complete assurance that the amount will be paid.

12

A cutoff test of sales complements the verification of

A/R

A purpose of a sales cutoff test is to obtain assurance that receivables are recorded in the appropriate period. Failure to observe a proper cutoff is a means of manipulating sales for the period under audit. The auditor should therefore examine sales and receivables recorded several days before and after the cutoff date and compare them with the sales invoices and shipping documents to assure they have been recorded in the proper period.

13

The standard AICPA form directed to financial institutions requests all of the following except

The principal amount paid on a direct liability.

The principal amount paid on a direct liability is not listed on the Standard Form to Confirm Account Balance Information with Financial Institutions. The auditor is not concerned with the amount of a liability already paid. The form confirms account number/description, balance, due date, interest rate, date through which interest is paid, and description of collateral.

14

An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that

There was an improper cutoff of sales at the end of the year.

The receivables turnover equals net credit sales divided by average receivables. An improper sales cutoff could result in recognition of next-year sales in the current year. The effect of adding the amount of these presumably uncollected receivables to the numerator and denominator is to decrease a ratio that exceeds 1.0.

15

If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the

Shipping documents to the sales invoices.

If a shipment occurred, matching shipping documents to recorded sales would disclose the understatement if no recorded sale could be found.

16

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Obtaining a current value appraisal of the collateral.

The auditor can test the valuation of the collateral by obtaining an external current value appraisal.

17

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA’s best direction of test is from the

Meter department records to the billing (sales) register.

The best direction of testing is to proceed from the meter department records, which indicate those customers who have received service, to the billing (sales) register. Comparing services rendered with billings is the best way to detect omitted billings.

18

Which of the following is not a principal objective of the auditor in the audit of revenues?

To verify cash deposited during the year.

The verification of cash deposits during the year is not part of the audit of revenues. Verification of cash and marketable securities is undertaken as a separate part of the audit program.

19

Tracing shipping documents to prenumbered sales invoices provides evidence that

Shipments to customers were properly invoiced.

The direction of testing to determine that shipments to customers were properly invoiced is from the shipping documents to the sales invoices.