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MULTIPLE CHOICES. Choose the one alternative that best completes
MULTIPLE CHOICES. Choose the one alternative that best completes the statement or answers the question.
1) What event initiates a transaction in the sales and collection cycle?
A) Receipt of cash. B) Customer request for goods.
C) Identification of a new customer. D) Delivery of product to a customer.
2) Before goods are shipped on account, a properly authorized person must
A) approve the journal entry. B) prepare the sales invoice.
C) approve credit. D) verify that the unit price is accurate.
3) A document prepared to initiate shipment of the goods sold is the
A) sales order. B) sales invoice. C) bill of lading. D) customer order.
4) The total of the individual account balances in the accounts receivable master file equals the
A) balance of the accounts receivable account in the general ledger.
B) total sales for the period.
C) balance of the sales account in the general ledger.
D) total sales less the total cash received for the period.
5) When designing audit procedures, the direction of tests is a crucial step in satisfying the
A) cutoff objective. B) completeness objective.
C) classification objective. D) valuation objective.
6) When sales invoices are automatically calculated and posted by a computer, the auditor may be
able to reduce substantive tests of transactions for which, if any, objective?
A) Accuracy. B) Existence.
C) Completeness. D) None of the above.
7) Many companies engage a bank to assist in the processing of cash receipts from customers. A
system in which receipts are submitted via computer from customers' bank accounts to a company
bank account is called
A) automated receipts transfer (ART). B) electronic funds transfer (EFT).
C) funds transfer protocol (FTP). D) receipt transfer protocol (RTP).
8) An audit procedure which compares the name, amount, and dates shown on remittance advices
with cash receipts journal entries and with related duplicate deposit slips would be effective in
C) sales without proper credit authorization.
D) illicit write-offs of customers as uncollectible accounts.
9) When posting the sales journal, details of the journal are posted to "x" and journal totals are posted
A) x = the accounts receivable master file. y = the general ledger.
B) x = the accounts receivable account in the general ledger. y = the sales account in the general
C) x = the sales account. y = the general ledger.
D) x = the sales account. y = the accounts receivable subsidiary ledger.
10) When a company uses a lockbox to speed the handling of cash receipts, who is generally
responsible for opening receipts?
A) Temporary employees in the town where the lockbox is located.
B) Company personnel.
C) Bank employees.
D) None of the above.
11) After the auditor has identified the key internal controls and deficiencies and assessed control risk,
it is appropriate to decide whether
A) substantive tests will be increased sufficiently to justify the cost of performing tests of
B) tests of controls will be increased sufficiently to justify the cost of performing substantive
C) tests of controls will be reduced sufficiently to justify the cost of performing substantive tests.
D) substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.
12) Management's assertions for sales and collection activities are ________ when sales are generated
via e-commerce activities.
A) expanded B) decreased C) mitigated D) unchanged
13) To test for recorded sales for which there were no actual shipments, the auditor traces from the
A) bill of lading to the supporting customer order and sales order.
B) sales journal to the accounts receivable subsidiary ledger.
C) sales journal to the bill of lading.
D) bill of lading to the sales journal.
14) One of the key internal controls to prevent invalid (fictitious) transactions in the sales and collection
A) to include the sales price list of all products in the computer files.
B) to account for the integrity of the numerical sequence of sales orders.
C) to include a list of customer numbers in the computer files.
D) having the bank reconciliation done by someone who is independent of the treasury function.
15) An effective procedure to test for unbilled shipments is to trace from the
A) sales journal to the accounts receivable ledger.
B) sales journal to the shipping documents.
C) shipping documents to the sales journal.
D) sales journal to the general ledger sales account.
16) The auditor traces items from the journals back to the source documents in order to satisfy the
A) ownership objective. B) valuation objective.
C) existence objective. D) completeness objective.
17) It is important that sales be billed and recorded in the journal as soon as possible after
A) shipment takes place.
B) the order is received and credit is approved.
C) credit is approved and it is verified that there is enough inventory to fill the order.
D) the order is received.
18) The purpose of substantive tests of transactions is to determine whether
A) the transactions this year are reasonable compared to prior years.
B) the internal control system is working.
C) the account balances are accurate.
D) there are monetary errors or irregularities in the transactions.
19) Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at
the balance sheet date?
A) Trace payments received subsequent to the balance sheet date.
B) Compare shipping documents with sales records.
C) Send accounts receivable confirmation requests.
D) Apply gross profit rates to inventory disposed of during the period.
20) For effective internal control, the billing function should be performed by the
A) sales department. B) credit and collection department.
C) shipping department. D) accounting department.
21) Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's
customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to
his friend for goods supposedly returned. The most effective procedure for preventing this activity
A) require receiving reports to support all credit memorandums before they are approved.
B) have the sales department independent of the accounts-receivable department.
C) prenumber and account for all credit memorandums.
D) mail monthly statements.
22) Proper separation of duties is useful to prevent various types of misstatements. Which of the
following is not an essential separation of duties?
A) Anyone responsible for inputting sales and cash receipts transactions information into the
computer should be denied access to cash.
B) Persons having access to cash should not have access to marketable securities.
C) Separate the credit-granting function from the sales function.
D) Personnel doing internal comparisons should be independent of those entering the original
23) The cashier diverted cash received over the counter from a customer to his own use and wrote off
the receivable as a bad debt. Select the control that should have prevented the error.
A) Receipts are given directly to the cashier by the person who opens the mail.
B) Remittance advices, letters, or envelopes that accompany receipts are separated and given
directly to the accounting department.
C) Journal entries are approved by a responsible official.
D) Aging schedules of accounts receivable are prepared periodically and reviewed by a
1) Which of the following types of receivables would not deserve the special attention of the auditor?
A) Accounts where no reply was received to a negative confirmation request.
B) Accounts that have been outstanding for a long time.
C) Receivables from affiliated companies.
D) Accounts with credit balances.
2) Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure,
which would normally include
A) comparing the total of the trial balance with the general ledger accounts receivable account.
B) test footing the total column and the columns depicting the aging.
C) tracing a sample of individual balances to supporting documents.
D) all of the above.
3) Generally accepted accounting principles require that material sales returns and allowances
A) be recorded as a debit to the sales account.
B) be recorded in the period when the merchandise is returned.
C) be matched with related sales.
D) be recorded in the period when the credit memo is issued.
4) Which of the audit objectives is performed first when doing the tests of details of balances for
A) 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.
B) Recorded accounts receivable exist.
C) Accounts receivable are owned.
D) Existing accounts receivable are included.
5) Analytical procedures are substantive tests and, if the results of the analytical procedures are
favorable, they will
A) reduce the extent of tests of details of balances.
B) reduce the tests of transactions.
C) reduce all of the other tests.
D) reduce the extent of tests of controls.
6) Tests of details of balances are directed to
A) income statement accounts for all cycles.
B) balance sheet accounts for some cycles and income statement accounts for other cycles.
C) all general ledger accounts for all cycles.
D) balance sheet accounts for all cycles.
7) Most tests of accounts receivable and the allowance for uncollectible accounts are based on
A) the results of confirmations.
B) the aged trial balance.
C) the results of analytical procedures.
D) the general ledger balance of each account.
8) If accounts receivable accounts with credit balances are significant, they should be
A) written off. B) corrected by making adjusting entries.
C) moved to the debit side. D) reclassified as accounts payable.
9) A 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.
10) This year is the first time that, as a normal practice in client's business, accounts receivable may be
pledged, assigned, factored, or sold at discount. The audit procedure which would not disclose
these practices would be
A) discussions with the client.
B) a review of the minutes of the board of directors' meetings.
C) examination of correspondence files.
D) confirmation of receivables.
11) When do most companies record sales returns and allowances?
A) During the accounting period in which the return occurs.
B) During the month in which the sale occurs.
C) Whenever the customer contacts the company regarding the credit.
D) Any of the above is correct.
12) A positive confirmation is more reliable evidence than a negative confirmation because
A) the debtor's lack of response indicates agreement with the stated balance.
B) the auditor has a document which can be used in court.
C) fewer confirmations can be sent out.
D) follow-up procedures can be performed if a response is not received from the debtor.
13) When positive confirmations are used, SAS No. 67 requires 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) Examine subsequent cash receipts to determine if the receivable has been paid.
B) Examine duplicate sales invoice to determine that the merchandise was ordered.
C) Examine shipping documents to verify that the merchandise was shipped.
D) Send a second confirmation request.
14) Which of the following most likely would be detected by an auditor's review of a client's sales
A) Excessive sales discounts. B) Unrecorded sales for the year.
C) Lapping of year-end accounts receivable. D) Unauthorized goods returned for credit.
15) The use of the positive (as opposed to the negative) form of receivables confirmation is preferred
A) internal control surrounding accounts receivable is considered to be effective.
B) there is reason to believe a significant portion of the requests will be made.
C) there is reason to believe that a substantial number of accounts may be in dispute.
D) a large number of small balances are involved.
16) If the auditor decides to not confirm accounts receivable, the auditor should
A) always use alternative procedures to audit the accounts receivable.
B) document the reasons for such a decision in the audit files.
C) do no more audit work.
D) follow B and C, but not A.
17) The understatement of sales and accounts receivable is best uncovered by
A) test of transactions for shipments made but not recorded.
B) confirming receivables.
C) reviewing the aged trial balance.
D) reconciling the accounts receivable general ledger account with the schedule of accounts
18) You are reviewing sales to discover cutoff problems. If the client's 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) several days subsequent to shipment.
B) at a time other than the point at which title passed.
C) before the merchandise was shipped.
D) at the time the merchandise was shipped.
19) Which of the following is not an important consideration in determining the sample size of
A) Tolerable misstatement.
B) The types of confirmations being sent; that is, positive or negative.
C) Total annual credit sales.
D) Achieved detection risk from other substantive tests.
20) Returns of positive-confirmation requests for accounts receivable were very poor. As an alternative
procedure, the auditor decided to check subsequent collections. The auditor had satisfied himself
that the client satisfactorily listed the customer name next to each check listed on the deposit slip;
hence, he decided that for each customer for which a confirmation was not received that he would
add all amounts shown for that customer on each validated deposit slip for the two months
following the balance-sheet date. The major fallacy in the auditor's procedure is that
A) a customer may not have made a payment during the two-month period.
B) the deposit slip would not be received directly by the auditor as a confirmation would be.
C) checking of subsequent collections is not an accepted alternative auditing procedure for
confirmation of accounts receivable.
D) by looking only at the deposit slip the auditor would not know if the payment was for the
receivable at the balance-sheet date or a subsequent transaction.
21) Which of the following internal control procedures will most likely prevent the concealment of a
cash shortage resulting from the improper write-off of a trade account receivable?
A) Write-offs must be authorized by company field sales employees who are in a position to
determine the financial standing of the customers.
B) Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
C) Write-offs must be approved by the cashier who is in a position to know if the receivables
have, in fact, been collected.
D) Write-offs must be supported by an aging schedule showing that only receivables overdue
several months have been written off.
22) The audit working papers often include a client-prepared, aged trial balance of accounts receivable
as of the balance sheet date. This aging is best used by the auditor to
A) test the accuracy of recorded charge sales.
B) estimate credit losses.
C) evaluate internal control over credit sales.
D) verify the validity of the recorded receivables.
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