12 arens aas 13ce tif 12 PDF

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Chapter 12 Audit of the Revenue Cycle12 Identify the accounts and the classes of transactions in the revenue cycle The two primary classes of transactions in the sales and collection cycle are A) sales and sales returns. B) sales and sales discounts. C) sales and accounts receivable. D) sales and ca...

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Test Item File for Arens, Auditing, 13CE

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Chapter 12 Audit of the Revenue Cycle 12.1 Identify the accounts and the classes of transactions in the revenue cycle 1) The two primary classes of transactions in the sales and collection cycle are A) sales and sales returns. B) sales and sales discounts. C) sales and accounts receivable. D) sales and cash receipts. Answer: D Diff: 1 Type: MC Page Ref: 368 Learning Obj.: 12-1 Identify the accounts and the classes of transactions in the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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2) A) Describe the four business functions that result in sales transactions in a typical sales and collection cycle and state the key documents and records involved in each function. B) State the five classes of transactions that comprise the sales and collection cycle. C) The sales and collections cycle is comprised of nine business functions. The first four functions result in sales transactions. Discuss the remaining five business functions that occur after sales transactions and identify the key documents and records involved in each of the five functions. Answer: A) The four business functions that result in sales transactions and their related documents and records are: • Processing customer sales orders. Key documents include customer purchase order and sales order. • Granting credit. External credit report, credit change form, accounts receivable trial balance. • Shipping goods. Shipping document (bill of lading), change of address form. • Billing customers and recording sales. Sales invoice, sales journal, summary sales report, monthly statements. B) The six classes of transactions that comprise the sales and collection cycle are: • sales (cash and sales on account) • cash receipts • sales returns and allowances • write off of uncollectible accounts • bad debt expense • master file changes C) The four business functions that occur after sales transactions, and related key documents and records, are: • processing and recording cash receipts: remittance advice, cash prelisting, bank deposit slips, bank deposit listing, cash receipts journal • processing and recording sales returns and allowances: returns receiving report, credit memo, sales returns and allowances journal • writing off uncollectible accounts receivable: uncollectible account authorization form • providing for bad debts: journal entry authorization • maintaining semi-permanent data: master file change form, master file change report Diff: 3 Type: ES Page Ref: 368, 368-373 Learning Obj.: 12-1 Identify the accounts and the classes of transactions in the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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12.2 Describe the business functions, documents, and records of the revenue cycle 1) Which of the following data elements would be included in the customer master file as semipermanent information? A) transaction date B) credit limit C) transaction amount D) amount paid Answer: B Diff: 3 Type: MC Page Ref: 369 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 2) Before goods are shipped on account to a new customer, a properly authorized person must A) prepare the sales invoice. B) approve the journal entry. C) approve credit. D) verify that the unit price is accurate. Answer: C Diff: 1 Type: MC Page Ref: 369 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 3) Poor controls over credit limit approval or in changing the credit limit in the master file may result in A) confused and frustrated customers. B) incomplete sales records. C) financial statement errors for sales and AR accounts. D) excessive bad debts and uncollectible account receivables. Answer: D Diff: 2 Type: MC Page Ref: 369 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 4) Which of the following control weaknesses could result in problems with collectability of accounts receivable? A) Unauthorized individuals can establish or change credit limits. B) Matching shipping documents to sales records is done weekly. C) When there is one error in a batch of transactions, the whole batch is rejected. D) Cash receipts are matched to the customer accounts rather than against specific invoices. Answer: A Diff: 3 Type: MC Page Ref: 369 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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5) A document prepared for shipment of the goods sold using a trucking company is called the A) sales order. B) bill of lading. C) sales invoice. D) customer order. Answer: B Diff: 1 Type: MC Page Ref: 370 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 6) Most companies recognize sales when A) a customer order is received. B) the merchandise is shipped. C) the merchandise is received by the customer. D) cash is received on account. Answer: B Diff: 2 Type: MC Page Ref: 370 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 7) Which of the following documents and records is used to record the packages, weights, and sizes shipped using an external trucking company? A) remittance advice B) shipping advice containing shipment tracking number C) returns receiving report D) bill of lading Answer: D Diff: 1 Type: MC Page Ref: 370 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 8) A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit memo issued, and the ending balance is the A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice. Answer: B Diff: 1 Type: MC Page Ref: 371 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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9) Some companies use a lockbox system, whereby customers mail payments to a post office box address. The lockbox contents could be handled by a bank, another external organization, or the owner of the company. One of the advantages of using a lockbox is that it A) improves segregation of duties. B) results in more accurate bank deposits. C) results in more accurate accounts receivables. D) provides more detailed bank deposit information. Answer: A Diff: 1 Type: MC Page Ref: 372 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 10) A document that describes which accounts receivable accounts are to be written off and why is called a(n) A) uncollectible account authorization form. B) journal entry authorization form. C) master file change form. D) sales returns and allowances journal. Answer: A Diff: 2 Type: MC Page Ref: 372 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 11) Zhang Corporation returned $6000 of defective goods to Meli Inc. Meli has a strict policy of no cash refund. Meli should A) write off the account receivable. B) issue a credit memo to Zhang. C) wait until Zhang places its next order to record the return. D) not adjust their accounting records since $6000 is not material for Meli. Answer: B Diff: 2 Type: MC Page Ref: 372 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle 12) Your audit client has many different types of accounts receivable: Canadian, American, and other international accounts; and short- and long-term accounts. There are also some sales on consignment. The company has used forward exchange contracts to reduce its exposure due to foreign exchange fluctuations. How will this affect the audit engagement? A) control risk will increase B) inherent risks of error will decrease C) risk of material misstatement increases D) audit risk will be increased Answer: C Diff: 2 Type: MC Page Ref: 376-377 Learning Obj.: 12-2 Describe the business functions, documents, and records of the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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12.3 Assess inherent risk and fraud risk for the revenue cycle 1) Audit risk is assessed for A) the financial statements as a whole and is not usually allocated to various accounts or objectives. B) the financial statements as a whole and then allocated to various accounts. C) various accounts but not for the financial statements as a whole. D) various accounts and objectives, and the sum is then assigned to the financial statements as a whole. Answer: A Diff: 3 Type: MC Page Ref: 373 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 2) As the quality of the enterprise risk management process declines, and the overall quality of internal controls declines, A) risk of fraud decreases. B) risk of fraud increases. C) the extent of control testing increases. D) the extent of substantive testing decreases. Answer: B Diff: 2 Type: MC Page Ref: 373-375 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 3) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the occurrence objective? A) recording subsequent period sales as current period sales B) the use of "bill and holds" (goods are invoiced but not shipped) C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue Answer: D Diff: 3 Type: MC Page Ref: 377 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 4) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective? A) avoiding recording of returns and allowances for the year B) recording subsequent period sales as current period sales C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue Answer: B Diff: 3 Type: MC Page Ref: 377-378 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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5) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the valuation objective? A) recording subsequent period sales as current period sales B) the use of "bill and holds" (goods are invoiced but not shipped) C) understatement of bad debts D) creation of fictitious sales that are misclassified as revenue Answer: C Diff: 3 Type: MC Page Ref: 377-378 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 6) The most difficult type of cash defalcation for the auditor to detect is that which occurs A) before the cash is recorded. B) after cash is recorded but before it goes to the bank. C) out of the balance kept in a cash register. D) in amounts under $100. Answer: A Diff: 1 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 7) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier A) prepares the daily deposit. B) makes the daily deposit at a local bank. C) records the receipts to the customer files. D) endorses the cheques with the company endorsement stamp. Answer: C Diff: 3 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 8) The appropriate test of controls for separation of duties is A) documentation. B) confirmation. C) examination. D) observation. Answer: D Diff: 2 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 9) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor? A) postponing recording of cash receipt entries B) overstating the accounts receivable control account C) overstating the accounts receivable subsidiary ledger D) recording cash receipt entries early Answer: A Diff: 3 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle Copyright © 2016 Pearson Education, Inc.

Test Item File for Arens, Auditing, 13CE

10) The defalcation process that postpones entries for the collection of accounts receivable to conceal an existing cash shortage is referred to as A) kiting. B) lapping. C) computer fraud. D) financial statement fraud. Answer: B Diff: 1 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 11) An audit procedure that 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 detecting A) kiting. B) lapping. C) illicit write-offs of customers as uncollectible accounts. D) sales without proper credit authorization. Answer: B Diff: 1 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 12) 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 approved by a responsible officer after review of credit department recommendations and supporting evidence. B) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. C) Write-offs must be approved by the cashier who is in a position to know if the accounts receivable have, in fact, been collected. D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers. Answer: A Diff: 3 Type: MC Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle 13) Which of the following actions is more likely to be a result of error rather than fraud? A) consignment sales are knowingly recorded as revenue B) orders are shipped to a customer with a bad credit rating C) fictitious revenue transactions are recorded and reported D) subsequent period revenue is deliberately recorded in the current period Answer: B Diff: 2 Type: MC Page Ref: 379 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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14) A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective. B) Discuss what is meant by proof of cash receipts and explain its purpose. Answer: A) The five specific transaction-related audit objectives for sales and common tests of controls are: • Recorded cash receipts are for funds actually received by the company (occurrence). Trace from cash receipts journal to bank statements. • Cash received is recorded in the cash receipts journal (completeness). Trace from remittance advices or prelisting to cash receipts journal. • Cash receipts are deposited and recorded at the amounts received (accuracy). Prepare a proof of cash receipts. • Cash receipts are recorded on the correct dates (cutoff). Compare dates of deposits with dates in the cash receipts journal and prelisting of cash receipts. • Cash receipts transactions are properly classified (classification). Examine documents supporting cash receipts for proper classification. B) A proof of cash receipts is an audit procedure in which the total cash receipts recorded in the cash receipts journal for a given period are reconciled with the actual deposits made to the bank during the same period. The purpose of a proof of cash receipts is to determine whether all recorded cash receipts have been deposited in the bank account. It can also identify unrecorded deposits. Diff: 2 Type: ES Page Ref: 378-380 Learning Obj.: 12-3 Assess inherent risk and fraud risk for the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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12.4 Develop and evaluate preliminary analytical procedures for the revenue cycle 1) Comparing bad debt expense as a percentage of gross sales with previous years will detect what kind of possible misstatement? A) cutoff errors in recording cash receipts B) overstatement of sales and accounts receivable C) understatement of sales and accounts receivable D) understatement of allowance for uncollectible accounts Answer: A Diff: 3 Type: MC Page Ref: 380 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle 2) As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is A) higher cost of goods sold. B) increased bad debt expenses. C) fictitious revenue. D) fictitious expenses. Answer: C Diff: 2 Type: MC Page Ref: 380-381 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle 3) As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is A) higher cost of goods sold. B) increased bad debt expenses. C) premature revenue recognition. D) fictitious expenses. Answer: C Diff: 2 Type: MC Page Ref: 380-381 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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4) As part of audit planning, you have calculated accounts receivable turnover for the last five years and compared it to industry averages. Your client's accounts receivable has decreased by about 1.25 times in the current year, while the industry rate has improved. One possible cause of this lowered accounts receivable turnover is A) higher cost of goods sold. B) increased bad debt expenses. C) fictitious revenue. D) fictitious expenses. Answer: C Diff: 2 Type: MC Page Ref: 380-381 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle 5) Comparison of individual customer balances with previous years will detect what type of possible misstatement? A) misstatement in gross profit and bad debt expense B) overstatement or understatement of bad debt expense C) overstatement or understatement of allowance for uncollectible accounts D) misstatements in accounts receivable and related income statement accounts Answer: D Diff: 3 Type: MC Page Ref: 380 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle 6) Stefano is performing a review of the accounts receivable for large and unusual amounts. Of the following accounts receivables, Stefano should pay special attention to an account receivable A) from a related party. B) for a large dollar amount. C) recorded close to year end. D) that is recurring. Answer: A Diff: 3 Type: MC Page Ref: 380-381 Learning Obj.: 12-4 Develop and evaluate preliminary analytical procedures for the revenue cycle

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Test Item File for Arens, Auditing, 13CE

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7) Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) t...