Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

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AUDITING THEORY
AT.3014 R.C.P. SOLIMAN/ K.J. UY
MAY 2021

DISCUSSION QUESTIONS
D 1. Which of the following is an account that is not
affected by the sales and collection cycle?
a. Cash
b. Allowance for doubtful accounts
c. Accounts receivable
d. Fixed assets
A 2. The auditor's objectives for the sales and cash
collections activities when the client is primarily an e-
commerce business as compared to a traditional
physical business are:
a. unchanged.
b. expanded.
c. mitigated.
d. decreased.
C 3. The overall objective in the audit of the sales and
collection cycle is to evaluate whether the account
balances affected by the cycle are fairly presented in D 11. Generally, when is the earliest point in the sales and
accordance with accounting standards.
The sales and collection cycle applies to businesses
that transfer goods to customers or provides services
to their customers.
a. True, False
b. False, True
c. True, True
d. False, False
D 4. Which of the following is not one of the classes of
transactions included in the sales and collection cycle?
a. Sales returns and allowances
b. Write-off of uncollectible accounts
c. Cash receipts
d. Interest Expense
D 5. What event initiates a transaction in the sales and
collection cycle?
a. Receipt of cash
b. Delivery of product to a customer
c. Identification of a new customer
d. Customer request for goods
b. Credit approval
c. Matching of shipping document with sales invoice
d. Receipt of sales order from the customer
B 9. A document prepared to initiate shipment of the goods
sold by an independent shipper is the:
a. sales order.
b. bill of lading.
c. sales invoice.
d. customer order.
A 10. The document used to indicate to the customer the
amount of a sale and payment due date is the:
a. sales invoice.
b. bill of lading.
c. purchase order.
d. sales order.
collection cycle in which revenue can be recognized?
a. When the sale is approved
b. When the credit approval process is finalized
c. When the cash is collected
d. When the goods have been shipped
D 12. The total of the individual account balances in the
accounts receivable subsidiary ledger should equal
the:
a. total sales for the period.
b. balance of the sales account in the general ledger.
c. total sales less the total cash received for the
period.
d. balance of the accounts receivable account in the
general ledger.
D 13. In the accounts receivable subsidiary ledger the length
of time the account has been due can be useful to the
client and the auditor in preparing the:
a. trial balance.
b. working trial balance.
c. accounts receivable trial balance.
d. aged accounts receivable trial balance.

C 6. A ________ is a document that indicates a request for C 14. Which of the following is a business function related to
merchandise by a customer. sales returns and allowances?
a. sales invoice a. Processing customer orders
b. vendor invoice b. Writing off uncollectible accounts
c. customer order c. Processing and recording credit memos
d. sales order d. Granting credit

A 7. A ________ is a document that is matched with the A 15. For a firm that practices good internal controls in the
customer order to assure that the correct quantity and sales and collections cycle, the function of indicating
type of goods are shipped. credit approval should be recorded on which of the
a. sales order following documents?
b. customer order a. Sales order
c. vendor invoice b. Sales invoice
d. sales invoice c. Customer order
d. Remittance advice
B 8. What critical event must take place before goods can
be shipped in order to assure payment can be A 16. Credit memos are normally issued to:
reasonably expected? a. adjust the customers balance to the amount owed
a. Determination of correct delivery address to the company because of returned goods or an

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 EXCEL PROFESSIONAL SERVICES, INC.
allowance.
b. assist in the aging of accounts receivable.
c. reduce customer frustration and sales losses.
d. inform the customer of the balance due.
B 17. When processing and recording cash receipts, an B 24. To test for recorded sales for which there were no
important fact to consider is:
a. the most important concern is depositing cash at
least twice daily.
b. the most important concern is the possibility of
theft.
c. theft can occur only after the receipts are entered
in the records.
d. it the customer fails to include a remittance
advice, the check should be returned to the B 25. An effective procedure to test for unbilled shipments
customer.
C 18. When designing audit procedures, tracing of source
documents to the customers subsidiary ledger and
subsequently to the general ledger is done to satisfy
what assertion?
a. Valuation
b. Cutoff
c. Completeness
d. Classification
B 19. When assessing risk control, the auditor must do all of
the following except:
a. assess control risk for each objective by evaluating
the controls and deficiencies for each objective.
b. perform the detailed test of balances.
c. identify the key internal controls and deficiencies. A 27. Prenumbered documents are intended to help:
d. associate the key controls and deficiencies with
the objectives.
A 20. 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, assertion?
a. Accuracy
b. Existence
c. Completeness
d. None of the above
A 21. Which one the following procedures performed for the
billing function provides evidence for the completeness
assertion?
a. Making sure that all shipments have been billed
b. Making sure that no shipment has been billed B
more than twice
c. Making sure that each shipment is billed at the
correct amount
d. Making sure that each shipment is billed to the
proper customer
D 22. When assessing planned control risk for sales:
a. the key internal controls and deficiencies for sales
will be the same for every company.
b. the audit objectives for sales will differ from
company to company.
c. a flowchart is required to help assess control risk
for sales.
d. assessing control risk for sales is a highly
subjective decision.
A 23. In determining the level of audit efficiency, once the
auditor has identified the key internal controls and
identified any deficiencies in order to determine the
level of control risk appropriate for a private company
client, it is appropriate to decide whether:
a. substantive tests can be reduced sufficiently to
justify costs of performing tests of controls.
b. substantive tests can be increased sufficiently to
justify costs of performing tests of controls.
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c. tests of controls can be increased sufficiently to
justify costs of performing substantive tests.
d. tests of controls can be reduced sufficiently to
justify costs of performing substantive tests.
actual shipments, the auditor vouches from the:
a. bill of lading to the sales journal.
b. sales journal to the shipping documents.
c. sales journal to the accounts receivable subsidiary
ledger.
d. bill of lading to the supporting customer order and
sales order.
is to trace from the:
a. sales journal to the shipping documents.
b. shipping documents to the sales journal.
c. sales journal to the accounts receivable ledger.
d. sales journal to the general ledger sales account.
B 26. To determine that sales are accurately recorded, the
unit prices on the duplicate sales invoices are normally
compared with:
a. the original invoices.
b. an approved master price list.
c. the amounts recorded in the sales journal for that
transaction.
d. the amounts posted to the customer's account in
the accounts receivable master file.
Prevent duplicate
Prevent the failure to billings or recordings
bill or record sales of sales
a. Yes Yes
b. No No
c. Yes No
d. No Yes
A 28. Which one of the following best describes the auditors
responsibilities regarding appropriate authorizations in
the sales/collections cycle?
a. B, C, and D should all be of concern to the auditor.
b. Credit must be authorized before the sale.
c. Goods must be shipped after the authorization.
d. Prices must be authorized.
29. Which one of the following is of the least concern to
the auditor when designing substantive tests of
transactions for the sales/collection cycle?
a. Sales being included in the journal for which no
shipment was made
b. Sales to related parties, such as officers and
subsidiaries
c. Sales recorded more than once
d. Shipments being made to nonexistent customers
and recorded as sales
B 30. Smith Manufacturing Company's accounts receivable
clerk has a friend who is also a Smith's customer. The
accounts receivable clerk has issued fictitious credit
memos to his friend for goods supposedly returned.
The most effective procedure for preventing this
activity is to:
a. prenumber and account for all credit
memorandums.
b. require receiving reports that provide evidence of
returned inventory items to support all credit
memorandums before they are approved.
c. have independent sales and accounts receivable
departments.
d. mail monthly statements to customers.
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 EXCEL PROFESSIONAL SERVICES, INC.
B 31. When an employee who is authorized to make
customer entries in the accounts receivable subsidiary
ledger, purposefully enters cash received into the
wrong customer's account that employee may be
suspected of:
a. kiting. A 39.
b. lapping.
c. floating.
d. shorting.
B 32. The audit procedure referred to as proof of cash
receipts is particularly useful to test:
a. time lags in making deposits.
b. whether all recorded cash receipts have been C 40. An auditor is comparing the write-off of uncollectible
deposited in the bank.
c. whether there are cash receipts that have not
been recorded in the journals.
d. the client's reconciliation between cash receipts
and bank deposits.
C 33. Which of the following would offer the best protection
for a company that wishes to prevent a reoccurrence
of a previously detected "lapping" problem with trade
accounts receivable?
a. Segregate duties so that the bookkeeper in charge
of the general ledger has no access to incoming C 41. The understatement of sales and accounts receivable
mail.
b. Segregate duties so that no employee has access
to both checks from customers and currency from
daily cash receipts.
c. Have customers send payments directly to the
company's depository bank.
d. Request that customer's payment checks be made
payable to the company and addressed to the C 42. Audit procedures designed to uncover credit sales
treasurer.
B 34. The auditor's primary concern in performing audit
procedures of the write-off of uncollectible accounts
relates to the risk that the client writes offs customer
accounts that have already been collected. The
primary control for preventing this fraud is:
a. examining authorized credit memos.
b. examining the uncollectible account authorization A 43. Cutoff misstatements occur:
form.
c. examining debit memos.
d. examining the vouchers payable register.
B 35. The two primary classes of transactions in the sales
and collection cycle are:
a. sales and sales discounts.
b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.
C 36. The appropriate and sufficient evidence to be obtained
from tests of details must be decided on an:
a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis.
d. none of the above.
C 37. Auditors are especially concerned with three aspects
of internal control for the sales and collection cycle.
Which of the following is not one of their major
concerns?
a. Controls over cutoff
b. Controls that prevent or detect embezzlements
c. Controls over sales discounts
d. Controls related to the allowance for uncollectible D 46. The most important test of details of balances to
accounts
D 38. Which of the following types of receivables would not
deserve the special attention of the auditor?
a. Accounts receivables with credit balances
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b. Accounts that have been outstanding for a long
time
c. Receivables from related parties
d. Each of the above would receive special attention.
Analytical procedures are substantive tests and, if the
results of the analytical procedures are favorable, the
auditor would normally:
a. 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.
accounts as a percentage of total accounts receivable
with previous years. A possible misstatement this
procedure could uncover is:
a. overstatement or understatement of sales.
b. overstatement or understatement of accounts
receivable.
c. overstatement or understatement of bad debt
expense.
d. overstatement or understatement of sales returns
and allowances.
is best uncovered by:
a. testing internal controls.
b. testing the aged accounts receivable trial balance.
c. substantive tests of transactions for shipments
made but not recorded.
d. substantive tests of transactions for bad debts.
made after the client's fiscal year end that relate to
the current year being audited provide evidence for
which of the following audit objective?
a. Realizable value
b. Accuracy
c. Cutoff
d. Existence
a. either by error or fraud.
b. by error only.
c. by fraud only.
d. randomly without causes related to errors or
fraud.
B 44. Which of the following is likely to be determined first
when performing tests of details for accounts
receivable?
a. 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.
A 45. An auditor is performing a credit analysis of customers
with balances over 60 days due. She is most likely
obtaining evidence for which audit related objective?
a. Realizable value
b. Existence
c. Completeness
d. Occurrence
determine the existence of recorded accounts
receivable is:
a. tracing details of sales invoices to shipping
documents.
b. tracing the credits in accounts receivable to bank
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 EXCEL PROFESSIONAL SERVICES, INC.
deposits.
c. tracing sales returns entries to credit memos
issued and receiving room reports.
d. the confirmation of customers' balances.
C 47. Confirmation of accounts receivable selected from the
trial balance is the most common test of details of
balances for the ________ of accounts receivable. C 56.
a. presentation
b. valuation
c. accuracy.
d. detail tie-in
A 48. If the client's internal control for recording sales
returns and allowances is evaluated as ineffective:
a. a larger sample may be 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 B 57. When designing tests of details of balances, an
customer.
C 49. Which of the following audit procedures would not
likely detect a client's decision to pledge or factor
accounts receivable?
a. 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
B 50. When do most companies record sales returns and
allowances?
a. During the month in which the sale occurs
b. During the accounting period in which the return
occurs
c. Whenever the customer contacts the company
regarding the credit
d. During the month after the sale occurs
B 51. The most important aspect of evaluating the client's
method of obtaining a reliable cutoff is to:
a. perform extensive detailed testing of cutoff.
b. evaluate the client's control procedures around
cutoff.
c. confirm a sample of transactions near period end
with customers.
d. confirm transaction with customers.
B 52. Which of the following audit procedure would normally
be included in the audit plan when auditing the D 60. Communication addressed to the debtor requesting
allowance for doubtful accounts?
a. Send positive confirmations.
b. Inquire of the client's credit manager.
c. Send negative confirmations.
d. Examine sales invoices.
C 53. Generally accepted accounting principles require that
revenue be reported net of sales returns and A 61. A type of positive confirmation known as a blank
allowances:
a. if practical.
b. if required by industry practice.
c. if the amounts are material.
d. any of the above.
D 54. If material, all of the following are required to be
separately disclosed in the financial statements
except for:
a. accounts receivable from officers.
b. accounts receivable from affiliates.
c. sales and assets for different business segments.
d. sales for the last ten days of the fiscal year.
C 55. For effective internal control, employees maintaining
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the accounts receivable subsidiary ledger should not
also approve:
a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.
One of the shortcomings in evaluating the allowance
for uncollectible accounts by reviewing individual
noncurrent balances on the aged trial balance is:
I. it is difficult to compare the results of the current
year with those of the previous year.
II. current accounts are ignored in establishing the
adequacy of the allowance.
a. I only
b. II only
c. both I and II
d. neither I or II
important point to remember is:
a. auditors emphasize income statement accounts.
b. the audit procedures selected depends heavily on
whether planned evidence for a given objective is
low, medium, or high.
c. if accounts receivable are overstated, then sales
will be understated.
d. sales cutoff is the most important test of details of
accounts receivable.
A 58. The net realizable value of accounts receivable is equal
to:
a. gross accounts receivable less allowance for
uncollectible accounts.
b. gross accounts receivable less bad debt expense.
c. gross accounts receivable less returns and
allowances.
d. gross accounts receivable less sales discounts.
C 59. Which of the following is the principle "weakness" of
using negative confirmations for your tests of details
of balances for accounts receivable?
a. They can only be used for large balance accounts.
b. They cannot not be used when account balances
"bunch" around a mean value.
c. Conclusions drawn from receiving no reply may
not be correct.
d. Response rates are generally too low to draw any
conclusions.
him or her to confirm whether the balance as stated
on the communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.
confirmation:
a. requests the recipient to fill in the amount of the
balance.
b. is considered less reliable than the regular positive
confirmation.
c. generates as high a response rate as the regular
positive confirmation form.
d. is used when the auditor is confirming several
small balances.
A 62. When positive confirmations are used, auditing
standards require alternative procedures for
confirmations not returned by the customer. Which of
the following would not be considered an alternative
procedure?
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 EXCEL PROFESSIONAL SERVICES, INC.

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 customer's purchase order and the
duplicate sales invoice to determine that the
merchandise was ordered.

C 63. Confirmation of accounts receivable balances normally

provides evidence concerning the:
a. valuation of the balances.
b. rights of the balances.
c. existence of the balances.
d. completeness of the balances.

C 64. If the auditor decides not to confirm accounts

receivable, the auditor should:
a. always use alternative procedures to audit the
accounts receivable.
b. include copies of customer statements in the audit
files.
c. document the reasons for such a decision in the
audit files.
d. include copies of customer sales invoices in the
audit files.

A 65. The most reliable evidence from confirmations is

obtained when they are sent:
a. as close to the balance sheet date as possible.
b. 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.

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