Chapter 7 Gleim

Question 1

an auditor testing a policy of obtaining credit approval before shipping goods to customers is a test of which assertion?

Answer 1

accuracy, valuation, allocation

Question 2

what is not an internal control activity designed to reduce the risk of errors in the billing process?

Answer 2

reconciling the control totals for sales invoices with the AR subledger

Question 3

which control would be effective in offsetting the AR clerk approving credit memos and having access to cash?

Answer 3

the owner reviewing credit memos after they are recorded

Question 4

which fraud activity would most likely be perpetrated due to lack of IC in the revenue cycle?

Answer 4

the write-off of AR by personnel who receive cash permits the misappropriation of cash

Question 5

which control would most likely ensure that all credit sales transactions of an entity are recorded (completeness)?

Answer 5

billing department supervisor matches prenumbered shipping documents with entries in the sales journal

Question 6

an auditors tests of controls for completeness of the revenue cycle usually include determining whether

Answer 6

an invoice is prepared for each shipping document

Question 7

sound IC principles dictate that immediately upon receiving checks from customers, a responsible employee should

Answer 7

prepare a duplicate listing of checks received

Question 8

accounts receivable is a _______ function and should not ______ transactions

Answer 8

recording, authorize transactions

Question 9

proper authorization of write-offs of uncollectible accounts should be approved in which department?

Answer 9

CFO

Question 10

to test overstatements of sales, the auditor should compare transactions in the

Answer 10

accounting records with source documents

Question 11

which procedure would an auditor do for year-end AR confirmations if the auditor did not receive replies to second requests?

Answer 11

inspect shipping records documenting the merchandise sold to customers

Question 12

which would give the most assurance concerning valuation about AR?

Answer 12

assessing the allowance for uncollectible accounts for reasonableness

Question 13

the AR turnover ratio increasing significantly over a two-year period could indicate:

Answer 13

the company is more aggressively collecting customer accounts

Question 14

a CPAs best direction of test in determining whether an electric company is billing all customers is:

Answer 14

comparing the meter department records to the billing register

Question 15

in a recession, the auditor would focus increased attention to the ________ account

Answer 15

allowance for doubtful accounts

Question 16

the most effective audit procedure for determining the collectability of an AR is the

Answer 16

review of subsequent cash collections

Question 17

collectibility pertains to the _______ assertion

Answer 17

valuation

Question 18

the three-way match of earned revenue involves which documents?

Answer 18

customer sales order, evidence of shipment, customer invoice

Question 19

which assertion relates to ensuring revenues are only recorded when duties are fulfilled?

Answer 19

existence/occurrence

Question 20

which assertion relates to ensuring revenues are only recorded once?

Answer 20

completeness and cutoff

Question 21

channel stuffing

Answer 21

sending products to distributors for the sole purpose of recognizing revenue, without any real customer order

Question 22

when controls are not operating effectively, RMM _______, DR _________, and substantive testing ________

Answer 22

increases, decreases, increases

Question 23

to test controls in the revenue cycle, auditors perform dual-direction testing to test for which two assertions?

Answer 23

completeness and occurrence

Question 24

dual-purpose procedure

Answer 24

qualify as both substantive procedures and tests of controls

Question 25

substantive procedures

Answer 25

design to obtain direct evidence about the dollar amounts in account balances

Question 26

tests of controls

Answer 26

designed to obtain evidence about the company’s performance of its own control activities

Question 27

_______ is always a significant risk

Answer 27

revenue

Question 28

how do substantive analytical procedures differ from tests of details?

Answer 28

SAP: develop an independent estimate and compare balance to that estimate
test of details: directly test the transactions that make up the account

Question 29

SAP and tests of details have an emphasis on ___________

Answer 29

existence

Question 30

what is the AR turnover ratio?

Answer 30

net sales divided by accounts receivable

Question 31

confirmations provide evidence of which two assertions?

Answer 31

• existence
• rights and obligations
  they do not provide evidence of valuation bc idk if custie can pay

Question 32

positive confirmations

Answer 32

ask customer to respond saying if the balance is correct or not
- used when cust. balances are relatively large

Question 33

negative confirmations

Answer 33

ask for a response only if something is wrong

Question 34

blank form positive confirmation

Answer 34

customer fills in the balance themselves (better evidence, lower response rate)

Question 35

nonresponses for positive confirmations should be audited by:

Answer 35

examining accounting source documents

Question 36

which four accounts are affected when a credit sale is recorded in the wrong period?

Answer 36

• AR
• sales revenue
• COGS
• inventory