Chapter 7: Revenue and Collection Cycle

Question 1

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company?
- receiving and processing customer orders
- collecting and depositing cash
- delivering goods and services
- billing customers
- purchasing raw materials

Answer 1

purchasing raw materials

Question 2

T/F: Prenumbered documents are an example of an internal control

Answer 2

True (they allow the system to check for unrecorded or duplicated transactions)

Question 3

What is the bill of lading?

Answer 3

a form the carrier signs to verify that the good are shipped

Question 4

A description of the goods being shipped as well as the quantity shipped is found on the ______.
- shipment record
- shipping order
- packing slip

Answer 4

packing slip

Question 5

Auditors review items in the pending order file for evidence of the _ of recorded sales and accounts receivable.

Answer 5

completeness

Question 6

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of ____ risk.

Answer 6

audit risk

Question 7

Prenumbered documents are important in testing the _ assertion and the _ assertion.

Answer 7

completeness; occurrence

Question 8

Because fictitious sales may be used to overstate assets, the _ assertion is important in the audit of accounts receivables and the _ assertion is important for sales.

Answer 8

1. accounts receivable: existence
2. sales: ocurrence

Question 9

According to AS 2201.A9, a financial statement assertion is _ if it has a “reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.”

Answer 9

relevant

Question 10

Access to accounts receivable records gives an individual ____. (Select all that apply)
- authorization
- recording responsibility
- custody of assets

Answer 10

• authorization
• recording responsibility

Question 11

“Frequent deficiencies related to the design and performance of audit procedures that address the assessed risk of material misstatement, particularly when auditing revenue” was observed in a 2018 inspection conducted by the ______.
- AICPA
- PCAOB
- SEC
- FASB

Answer 11

PCAOB

Public Company Accounting Oversight Board

Question 12

Difficulties in estimating the allowance for doubtful accounts can be due to ____. (Select all that apply)
- changing economic conditions
- change in customer base
- a decrease in sales
- revised credit policies

Answer 12

• changing economic conditions
• change in customer base
• revised credit policies

Question 13

Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as _ risk.

Answer 13

inherent

Question 14

Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for ______.
- existence to be higher than for completeness
- existence to be equal to completeness
- completeness to be higher than for existence

Answer 14

existence (accounts receivable) to be higher than for completeness

Question 15

A strong entity-level control in the revenue process is ______.
- involvement of the internal audit department in the revenue process
- interim auditing procedures by the external auditors
- overall performance review by management

Answer 15

overall performance review by management

Question 16

The issuance of FASB ASC 606 has likely made difficulties with auditing revenues ____ challenging.
- more
- less

Answer 16

more

Question 17

Verifying the dates on sales documents helps reduce the risk of misstatement related to the ____ assertion of revenue.

Answer 17

cutoff

Question 18

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, _ is a high risk assertion.

Answer 18

valuation

Question 19

If a control is missing or ineffective, ______. (Select all that apply)
- there is most certainly an error or fraud in the financial statements
- auditors need to design substantive procedures related to control failure
- the risk of material misstatement increases

Answer 19

• the risk of material misstatement increases
• auditors need to design substantive procedures related to control failure

Question 20

Substantive procedures are ____.
- always performed in the revenue cycle
- never performned in the revenue cycle
- only performed if inherent risk is assessed as high
- only performed in the revenue cycle if control risk is high

Answer 20

always performed in the revenue cycle

Question 21

Regarding the revenue process, management should ____. (Select all that apply)
- evaluate the timeliness of accounts payable payments
- continually review revenues and compare them to budget and forecasts
- review merchandise returns
- scrutinize total write-offs of accounts receivables

Answer 21

• review merchandise returns
• scrutinize total write-offs of accounts receivables

NOT evaluate the timeliness of accounts payable payments (shoud scrutinize the timelienss of collections, not payments

Question 22

A review of the adequacy of the provision for bad debt expense is an example of a ______.
- substantive analytical procedure
- substantive test of details
- test of controls
- dual-purpose procedure

Answer 22

substantive analytical procedure

Question 23

Which of the following documents should be matched before recording revenue? (Select all that apply)
- evidence of shipment
- customer invoice
- customer credit authorization
- customer sales order

Answer 23

• evidence of shipment
• customer invoice
• customer sales order

Question 24

When considering relevant assertions and obtaining evidence about accounts receivable and other assets, auditors must emphasize the ____ assertion.

Answer 24

existence

Question 25

If controls are not in place or personnel are not performing control activities effectively, auditors need to design ____ procedures to try to detect whether control failures have produced material misstatements in the financial statements.

Answer 25

substantive

Question 26

Justifications for not using confirmations may include ______. (Select all that apply) - receivables are not material - confirmations would be ineffective - other procedures provide sufficient, competent evidence - other procedures require less of the auditor's time

Answer 26

- receivables are not material - confirmations would be ineffective - other procedures provide sufficient, competent evidence

Question 27

Which of the following statements regarding the revenue cycle are correct? (Select all that apply) - most auditing clients have inadequate controls - it consists of routine transactions - there is always a presumptive risk of fraud - tests of controls often support a reduction in control risk

Answer 27

- it consists of routine transactions - there is always a presumptive risk of fraud - tests of controls often support a reduction in control risk

Question 28

Confirmations provide evidence of ____. (Select all that apply) - rights and obligations - presentation and disclosure - valuation - existence

Answer 28

- rights and obligations - existence

Question 29

Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a ______. - substantive test of details - test of controls - dual-purpose procedure - substantive analytical procedure

Answer 29

- substantive test of details

Question 30

T/F: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.

Answer 30

False (Confirmations is considered a required auditing procedure)

Question 31

Which of the following statements are correct? (Select all that apply) - auditors may not receive an oral reponse to a confirmation - confirmation returned as "undeliverable" are always a red flag - confirming a specific transaction is often more effective than confirming the account balance - confirmations of accounts, loans, and notes receivable produces sufficient evidence of the rights assertion

Answer 31

- confirmation returned as "undeliverable" are always a red flag - confirming a specific transaction is often more effective than confirming the account balance ## Footnote an oral response may be received, but does not meet definition of an external confirmation; debtors may not be aware that the client sold the receivable

Question 32

When an auditor receives an oral response to a confirmation ______. (Select all that apply) - alternative audit procedures may be warranted - a written response still needs to be requested - the definition of external confirmatoin has been met

Answer 32

- alternative audit procedures may be warranted - a written response still needs to be requested

Question 33

Tracing shipping documents before and after year-end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the ____ assertion.

Answer 33

cutoff

Question 34

An automated procedure designed to test all items in a population in order to identify violations of a particular control activity is called _ testing.

Answer 34

exception

Question 35

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use _ testing.

Answer 35

exception