Chapter16 - final.doc

CHAPTER 16 Multiple-Choice Questions1.easyWhich of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?aa.Timingb.Realizable valuec.Completenessd.Accuracy2.The two primary classes of transactions in the sales and collection cycle are:easya.sales and sales discounts.bb.sales and cash receipts.c.sales and sales returns.d.sales and accounts receivable.3.The appropriate evidence to be obtained from tests of details must be decided on a(n):easya.efficiency basis.cb.effectiveness basis.c.audit objectives basis.d.none of the above.4.easyWhich of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?da.Accuracyb.Completenessc.Rightsd.Each of the above is a balance-related audit objective5.easyTests of which balance-related audit objective are normally performed first in an audit of the sales and collection?da.Accuracyb.Completenessc.Rightsd.Detail tie-in6.easyFor most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives? da.Timing and realizable value.b.Completeness and existence.c.Existence and accuracy.d.Realizable value and cutoff.7.easyWhich of the following types of receivables would not deserve the special attention of the auditor?da.Accounts receivables with credit balances.b.Accounts that have been outstanding for a long time.c.Receivables from affiliated companies.d.Each of the above would receive special attention.8.easybA listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:a.customer list.b.aged trial balance.c.accounts receivable ledger.d.schedule of accounts receivable.9.easyTesting the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:da.test footing the total column and the columns depicting the paring the total of the trial balance with the general ledger accounts receivable account.c.none of the above.d.all of the above.10.easyAuditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which of the following is not one of those controls?ca.Controls that detect or prevent embezzlements.b.Controls over cutoff.c.Controls over acquisitions.d.Controls related to the allowance for doubtful accounts.11.Cutoff misstatements occur when:easyda.the auditor mistakenly asks the bank for the end-of-year bank statement instead of the statement which would include the two succeeding weeks.b.subsequent period transactions are recorded in the current period.c.current period transactions are recorded in the subsequent period.d.both b and c above, but not a.12.Cutoff misstatements occur:easya.either by error or fraud.ab.by error only.c.by fraud only.d.randomly without causes related to errors or fraud.13.Generally accepted accounting principles require that material sales returns and allowances be:easya.recorded in the period when the merchandise is returned.cb.recorded in the period when the credit memo is issued.c.matched with related sales.d.recorded as a debit to the sales account.14.easyCommunication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:da.representation letter.b.negative confirmation.c.bank confirmation.d.positive confirmation.15.A type of positive confirmation known as a blank confirmation:easya.requests the recipient to fill in the amount of the balance.ab.is considered less reliable than the regular positive confirmation.c.generates as high a response rate as the regular positive confirmation form.d.has all of the attributes of a, b, and c above.16.mediumFor sales, the occurrence transaction-related audit objective affects the _ balance-related audit pletenessc.rightsd.detail tie-in17.mediumFor cash receipts, the occurrence transaction-related audit objective affects the _ balance-related audit pletenessc.rightsd.detail tie-in18.mediumWhich of the following is likely to be performed first when doing tests of details for accounts receivable?ba.Recorded accounts receivable exist.b.Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.c.Accounts receivable are owned.d.Existing accounts receivable are included.19.mediumAnalytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor will:aa.reduce the extent of tests of details of balances.b.reduce the extent of tests of controls.c.reduce the tests of transactions.d.reduce all of the other tests.20.The most important test of details of accounts receivable is the:mediuma.detail tie-in of the records.cb.analysis of the allowance for doubtful accounts.c.confirmation of accounts bination of the above.21.mediumThe extent of the testing of detail tie-in of an aged trial balance depends on all but which of the following?da.The number of accounts involved.b.The degree to which the master file has been tested as a part of tests of controls tests of transactions.c.The extent to which the schedule has been verified by an independent person before it is given to the auditor.d.The extent of testing depends on each of the above.22.Tests of details of balances are directed to:mediuma.balance sheet accounts for all cycles.ab.income statement accounts for all cycles.c.balance sheet accounts for some cycles and income statement accounts for other cycles.d.all general ledger accounts for all cycles.23.The most important test of details of balances for accounts receivable is:mediuma.confirmations.ab.recalculation of the aged receivables and uncollectible accounts.c.tracing credit memos for returned merchandise to receiving room reports.d.tracing from shipping documents to journals to the accounts receivable ledger.24.Most tests of accounts receivable and the allowance for uncollectible accounts are based on the:mediuma.general ledger balance of each account.db.results of analytical procedures.c.results of confirmations.d.aged trial balance.25.mediumThe most important test of details of balances to determine the existence of recorded accounts receivable is:da.tracing details of sales invoices to shipping documents.b.tracing the credits in accounts receivable to bank deposits.c.tracing sales returns entries to credit memos issued and receiving room reports.d.the confirmation of customers balances.26.mediumWhen should auditors not perform alternative procedures in testing the accounts receivable balance?ca.When customers do not return confirmation requests.b.When confirmations are deemed to be ineffective as an audit procedure.c.When confirmations are too costly to use.d.Alternative procedures should never be used.27.mediumBecause of its central role in auditing of accounts receivable, the _ is one of the first items tested.ca.accounts receivable master fileb.customer filec.aged trial balanced.sales register28.If accounts receivable accounts with credit balances are significant, they should be:mediuma.written off.cb.moved to the debit side.c.reclassified as accounts payable.d.corrected by making adjusting entries.29.Most tests of accounts receivable are based on what schedule, file, or listing?mediuma.Sales master file.bb.Aged accounts receivable trial balance.c.Accounts receivable master file.d.None of the above.30.mediumcAn auditor discovers that the client records sales returns and allowances in the accounting period in which they occur, under the assumption of approximately equal offsetting errors at the beginning and end of each period.a.This is acceptable.b.This is not acceptable.c.This is acceptable as long as the amounts are not significant.d.This is not acceptable as long as the amounts are not significant.16-1431.mediumIf the clients internal control for recording sales returns and allowances is evaluated as ineffective:aa.a larger sample is needed to verify cutoff.b.sampling is not appropriate.c.all sales returns must be traced to supporting documentation.d.all sales returns must be confirmed with the customer.32.mediumbA customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. a.This is a cutoff misstatement.b.This is a timing difference.c.Both a and b.d.Neither a nor b.33.mediumWhich of the following audit procedures would not likely detect a clients decision to pledge or factor accounts receivable?ca.A review of the minutes of the board of directors meetings.b.Discussions with the client.c.Confirmation of receivables.d.Examination of correspondence files.34.When do most companies record sales returns and allowances?mediuma.During the month in which the sale occurs.bb.During the accounting period in which the return occurs.c.Whenever the customer contacts the company regarding the credit.d.Any of the above is correct.35.Cutoff misstatements can occur for:mediuma.sales.db.sales returns and allowances.c.cash collections.d.any of the above.36.The most important aspect of evaluating the clients method of obtaining a reliable cutoff is to:mediuma.perform extensive detailed testing of cutoff.bb.evaluate the clients control procedures around cutoff.c.confirm a sample of transactions near period end with customers.d.perform any of the above.37.A positive confirmation is more reliable evidence than a negative confirmation because:mediuma.fewer confirmations can be sent out.db.the auditor has a document which can be used in court.c.the debtors lack of response indicates agreement with the stated balance.d.follow-up procedures can be performed if a response is not received from the debtor.38.The advantage of using the negative form of confirmations is that:mediumaa.larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.b.customers silence proves that the balance is correct.c.follow-up procedures are scheduled automatically.d.it is appropriate in all circumstances.39.mediumWhich of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?da.Examine credit files for select customers.b.Inquire of the clients credit manager.c.Review the clients correspondence files related to select customers.d.Auditors generally perform all of the above procedures.40.mediumaWhen positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?a.Send a second confirmation request.b.Examine subsequent cash receipts to determine if the receivable has been paid.c.Examine shipping documents to verify that the merchandise was shipped.d.Examine customers purchase order and the duplicate sales invoice to determine that the merchandise was ordered.41.mediumGenerally accepted accounting principles require that sales returns and allowances be matched with related sales:ca.if practical.b.if required by industry practice.c.if the amounts are material.d.any of the above.42.For which of the following accounts is cutoff least important?mediuma.Salescb.Sales returns and allowancesc.Cash collectionsd.Cutoff is equally important for each of the above.43.mediumWhat are the possible disadvantages of evaluating the allowance for doubtful accounts by reviewing individual non-current balances?ca.Current accounts receivable may be ignored.b.It is difficult to compare results of the current and prior years if such an unstructured approach is used.c.Both a and b.d.None of the above.44.Which of the following most likely would be detected by a review of a clients sales cutoff?mediuma.Excessive sales discounts.bb.Unrecorded sales for the year.c.Unauthorized goods returned for credit.d.Lapping of year-end accounts receivable.45.The positive (as opposed to the negative) form of receivables confirmation is preferred when:ernal control surrounding accounts receivable is considered to be effective.bb.there is reason to believe that a substantial number of accounts may be in dispute.c.a large number of small balances are involved.d.there is reason to believe a significant portion of the requests will be made.46.mediumAn auditor should perform alternative procedures to substantiate the existence of accounts receivable when:aa.no reply to a positive confirmation request is received.b.no reply to a negative confirmation request is received.c.collectibility of the receivables is in doubt.d.pledging of the receivables is probable.47.How might the auditor determine whether a client has limited rights to accounts receivable?mediuma.Review minutes from board of directors meetings.db.Inquiries of the client.c.Review bank confirmations.d.Any of the above may be used for this purpose.48.Confirmation of accounts receivable balances normally provides evidence concerning the:mediuma.valuation of the balances.cb.rights of the balances.c.existence of the pleteness of the balances.49.If the auditor decides not to confirm accounts receivable, the auditor should:mediuma.always use alternative procedures to audit the accounts receivable.cb.do no more audit work.c.document the reasons for such a decision in the audit files.d.follow b and c, but not a.50.The understatement of sales and accounts receivable is best uncovered by:challenginga.confirming receivables.cb.reviewing the aged trial balance.c.test of transactions for shipments made but not recorded.d.reconciling the accounts receivable general ledger account with the schedule of accounts receivable.51.challengingaYou are reviewing sales to discover cutoff problems. If the clients policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:a.before the merchandise was shipped.b.at the time the merchandise was shipped.c.several days subsequent to shipment.d.at a time after the point at which title passed.52.It is easy to test for a cash receipts cutoff error by:challenginga.reconciling the bank statement.db.performing a four-column proof-of-cash.c.observing the counting of cash at the balance sheet date.d.tracing recorded cash receipts to bank deposits on the bank statement of a different period.53.The most reliable evidence from confirmations is obtained when they are sent:challenginga.as close to the balance sheet date as possible.ab.at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year.c.several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required.d.at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.54.challengingWhich of the following is not an important consideration in determining the sample size of confirmations?aa.The types of confirmations being sent; that is, positive or negative.b.The results of related analytical procedures.c.Total annual credit sales.d.Each of the above is an important factor.55.challengingdAn auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:a.overstate the current ratio with no effect on working capital at December 31.b.overstate both working capital and the current ratio at December 31.c.overstate working capital with no effect on the current ratio at December 31.d.leave both working capital and the current ratio unchanged at December 31.56.challengingFor effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:ca.employee overtime wages.b.credit granted to customers.c.write-offs of customer accounts.d.cash disbursements.57.challengingFor most audits, a proper cash