Study Unit 11 - Evidence — The Sales-Receivables-Cash Cycle

Question 1

How can the completeness assertion be tested for sales and receivables?

Answer 1

• Reconciling total amounts in subsidiary ledgers with the general ledger
• Performing analytical procedures (e.g., comparing accounts receivable turnover with previous year)
• Accounting for the numerical sequence of sales orders, shipping documents, and invoices
• Comparing shipping documents with sales invoices and journal entries to test whether the related sales were
  recorded at the time of sale

Question 2

How can the accuracy, valuation, and allocation assertion be tested for sales and receivables?

Answer 2

• Obtaining management representation letters
• Evaluating disclosures about reportable operating segments (e.g., geographic areas)
• Comparing general ledger balances with financial statement balances
• Preparing bank reconciliations
• Comparing aged accounts receivables schedule with the prior year’s
• Tracing subsequent cash receipts
• Reviewing delinquent customers’ credit ratings
• Testing the allowance for credit losses and write-offs

Question 3

How can the existence assertion be tested for sales and receivables?

Answer 3

• Sending external confirmations
• Vouching journals to shipping documents

Question 4

What is lapping of accounts receivable?

Answer 4

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. This is similar to a Ponzi scheme.

Question 5

How can the cutoff assertion be tested for sales and receivables?

Answer 5

• Sales cutoff - Testing whether revenue is recognized in the appropriate period
  
  • Tracing shipping documents to accounting record near year end
• Cash receipts cutoff - Testing the recording of cash receipts and accounts receivable reduction
  
  • Tracing daily remittance list to accounting records near year end

Question 6

How can the rights and obligations assertion be tested for sales and receivables?

Answer 6

• Inquiring of management (e.g., whether the accounts receivable is pledged and factored)
• Tracing cash receipts to deposits into bank accounts
• Determining the right of return, expected returns, and actual returns

Question 7

How can the occurrence assertion be tested for sales and receivables?

Answer 7

• Vouching samples of recorded sales transactions to customers orders and shipping documents

Question 8

How can the classification assertion be tested for sales and receivables?

Answer 8

Evaluating classification of
- Sales (minus returns and allowances) as revenue
- Accounts receivables (minus allowances) as current assets

Question 9

How can the completeness assertion be tested for cash?

Answer 9

Cash receipts
- Tracing daily remittance list to deposit tickets
- Developing expectations based on management’s cash budgets

Cash disbursements
- Tracing the last check written to accounting records
- Developing expectations based on management’s cash budgets

Question 10

How can the accuracy, valuation, and allocation assertion be tested for cash?

Answer 10

• Comparing sampled remittance lists with deposits, journal entries, and ledger postings
• Comparing general ledger balances with financial statement balances

The valuation assertion normally does not require testing except for such special circumstances as holdings of foreign currency.

Question 11

How can the existence assertion be tested for cash?

Answer 11

• Counting cash on hand
• Sending bank confirmations
• Preparing bank reconciliations
• Requesting cutoff bank statements
• Preparing schedules of interbank transfers
• Preparing a proof of cash

Question 12

Does a cutoff bank statement search for checks written before year end and listed as outstanding on the bank reconciliation?

Answer 12

A cutoff bank statement searches for checks written before year end but not listed as outstanding on the bank reconciliation.

Question 13

How can the cutoff assertion be tested for cash?

Answer 13

• Tracing the daily remittance lists near year end
• Tracing the last check written for the year into the records

Question 14

How can the rights and obligations assertion be tested for cash?

Answer 14

• Sending bank confirmations
• Inquiring of managment

Question 15

How can the occurrence assertions be tested for cash?

Answer 15

• Cash receipts
  
  • Vouching recorded cash receipts to customer orders
• Cash disbursements
  
  • Vouching recorded cash disbursements to approved accounts payable

Question 16

How can the classification assertion be tested for cash?

Answer 16

• Testing whether restricted cash is reported as non current assets
• Assessing the statement of cash flows

Question 17

Describe kiting in the cash cycle.

Answer 17

Kiting is the recording of a deposit from an interbank transfer in the current period while failing to record the related disbursement until the next period. This fraud overstates the cash account.