Audit Test 3 Study Guide

HW 5 CASH AR

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
 Restrictions placed on sales by laws and regulations.
 Decline in sales due to economic declines.
 Over-recorded sales due to a lack of control over the sales entry function.
 Decline in sales due to product obsolescence.

Which of the following would provide the most assurance concerning the valuation of accounts receivable?
 Trace amounts in the accounts receivable subsidiary ledger to details on shipping
documents.
 Compare receivable turnover ratios to industry statistics for reasonableness.
 Inquire about receivables pledged under loan agreements.
 Assess the allowance for uncollectible accounts for reasonableness.

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Which of the following is an example of misappropriation of assets relating to sales?

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 Accidentally recording cash that represents a liability as revenue.

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 Holding the sales journal open to record next year’s sales as having occurred in the current
year.

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 Intentionally recording cash received from a new debt agreement as revenue.
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Theft of cash register sales.
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The auditors should confirm accounts receivable unless the auditors’ assessment of the risk of material misstatement
is low.
And the effectiveness of confirmations is absolutely determined.
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 And accounts receivable are immaterial, or the use of confirmations would be ineffective.
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 And accounts receivable are composed of large accounts.

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 Or accounts receivable are from extremely reputable customers.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?
 Collectibility is reasonably assured.
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 Delivery has occurred or is scheduled to occur in the near future.

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 Persuasive evidence of an arrangement exists.

 The seller’s price to the buyer is fixed or determinable.

To determine that all sales have been recorded, the auditors would select a sample of transactions
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from the:
 Accounts receivable subsidiary ledger.
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 Shipping documents file.

 Sales journal.
 Remittance advices.
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Which of the following would most likely be detected by an auditor’s review of the client’s sales cutoff?
 Inflated sales for the year.
 Excessive goods returned for credit.
 Unrecorded sales discounts.
 Lapping of year-end accounts receivable.

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 To test the existence assertion for recorded receivables, the auditors would select a sample from the:
 Accounts receivable subsidiary ledger.
 Shipping documents (bills of lading) file.
 Customer purchase orders.
 Sales orders file.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents
to related sales invoices?
 Presentation and disclosure.
 Rights and obligations.
 Completeness.
 Existence or occurrence.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent
residents’ delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of
the accounts receivable balances at the balance sheet date, Cooper would most likely:
 Send positive confirmation requests.

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Send negative confirmation requests.

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 Examine evidence of subsequent cash receipts.

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 Inspect the internal records, such as copies of the tax invoices that were mailed to the

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residents.

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Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper
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write-off of a trade account receivable:
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 Write-offs must be approved by a responsible official after review of credit department
recommendations and supporting evidence.
 Write-offs must be approved by the accounts receivable department.
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 Write-offs must be authorized by the shipping department.

 Write-offs must be supported by an aging schedule showing that only receivables overdue by
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several months have been written off.

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Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client’s
employees?
 A bank lockbox system.
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 Prenumbered remittance advices.

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 Monthly bank reconciliations.

 Daily deposit of cash receipts.
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To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine
a sample of paid vouchers and determine whether each voucher is:
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 Stamped “paid” by the check signer.

 Approved for authorized purchases.
 Supported by a vendor’s invoice.
 Prenumbered and accounted for.
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 In testing controls over cash disbursements, the auditors most likely would determine that the person who signs
checks also:
 Reviews the monthly bank reconciliation.
 Returns the checks to accounts payable.
 Is denied access to the supporting documents.
 Is responsible for mailing the checks.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the
following except:
 General ledger.
 Year-end bank statement.
 Bank confirmation.
 Cutoff bank statement.

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures
relating to cash. You decide that it would be preferable to:
 Count the cash in advance of the balance sheet date in order to disclose any kiting

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operations at year-end.

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 Coordinate the count of cash with the cutoff of accounts payable.

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 Coordinate the count of cash with the count of marketable securities and other negotiable

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assets.
Count the cash immediately upon the return of the confirmation letters from the financial

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institution.
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Which of the following procedures would the auditors most likely perform to test controls relating to
management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
 Observe the consistency of the employees’ use of cash registers and tapes.
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 Inquire about employees’ access to recorded but undeposited cash.

 Trace deposits in the cash receipts journal to the cash balance in the general ledger.
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 Compare the cash balance in the general ledger with the bank confirmation request.
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Reconciliation of the bank account should not be performed by an individual who also:
 Processes cash disbursements.
 Has custody of securities.
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 Prepares the cash budget.

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 Reviews inventory reports.

The auditors suspect that a client’s cashier is misappropriating cash receipts for personal use by lapping
customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most
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likely would compare the:

 Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are
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actually recorded.
 Details of bank deposit slips with details of credits to customer accounts.
 Individual bank deposit slips with the details of the monthly bank statements.
 Daily cash summaries with the sums of the cash receipts journal entries.
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In order to guard against the misappropriation of company-owned marketable securities, which of the following

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 is the best course of action that can be taken by a company with a large portfolio of marketable securities?
 Require that employees who enter and leave the safekeeping area sign and record in a log
the exact reason for their access.
 Require that employees involved in the safekeeping function maintain a subsidiary control
ledger for securities on a current basis.
 Require that the safekeeping function for securities be assigned to a bank or stockbroker
that will act as a custodial agent.
 Require that one trustworthy and bonded employee be responsible for access to the
safekeeping area where securities are kept.

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase
securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive.
The best person or persons to make periodic reviews of the investment activity would be:
 The treasurer.
 The corporate controller.
 An investment committee of the board of directors.
 The chief operating officer.

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The auditors who physically examine securities should insist that a client representative be present in order to:
 Detect fraudulent securities.

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 Acknowledge the receipt of securities returned.

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 Lend authority to the auditors’ directives.
Coordinate the return of securities to the proper locations.

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The best way to verify the amounts of dividend revenue received during the year is:
 Confirmation with dividend-paying companies.
 Examination of cash disbursements records.
 Recomputation.
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 Verification by reference to dividend record books.

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