Chapter 8 Audit of Sales and Receipts Cycle
(I)
Multiple Choice Questions
1.
Which of the following procedures would an auditor most likely perform to test
controls relating to management’s assertion about the completeness of cash
receipts for cash sales at a retail outlet?
2.
3.
A
B
C
Observe the consistency of the employees’ use of cash registers and tapes.
Inquire about employees’ access to recorded but undeposited cash.
Trace deposits in the cash receipts journal to the cash balance in the
D
general ledger.
Compare the cash balance in the general ledger with the bank confirmation
request.
Sound internal control dictates that immediately upon receiving checks from
customers by mail, a responsible employee should
A
B
C
Add the cheques to the daily cash summary.
Verify that each check is supported by a prenumbered sales invoice.
Prepare a duplicate listing of checks received.
D
Record the cheques in the cash receipts journal.
Tracing shipping documents to prenumbered sales invoices provides evidence
that
A
B
C
D
4.
No duplicate shipments or billings occurred.
Shipments to customers were properly invoiced.
All goods ordered by customers were shipped.
All prenumbered sales invoices were accounted for.
An auditor suspects that a client’s cashier is misappropriating cash receipts for
personal use by lapping customer cheques received in the mail. In attempting to
uncover this embezzlement scheme, the auditor most likely would compare the
A
B
Dates cheques are deposited per bank statements with the dates remittance
credits are recorded.
Daily cash summaries with the sums of the cash receipts journal entries.
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5.
C
Individual bank deposit slips with the details of the monthly bank
D
statements.
Dates uncollectible accounts are authorized to be written off the dates the
write-offs are actually recorded.
Upon receipt of customers’ cheques in the mailroom, a responsible employee
should prepare a remittance listing that is forwarded to the cashier. A copy of the
listing should be sent to the
A
B
Internal auditor to investigate the listing for unusual transactions.
Treasurer to compare the listing with the monthly bank statement.
C
Accounts receivable bookkeeper to update the subsidiary accounts
receivable records.
Entity’s bank to compare the listing with the cashier’s deposit slip.
D
6.
Which of the following procedures most likely would not be a control designed
to reduce the risk of misstatements in the billing process?
A
B
C
D
7.
Comparing control totals for shipping documents with corresponding totals
for sales invoices.
Using computer programmed controls on the pricing and mathematical
accuracy of sales invoices.
Matching shipping documents with approved sales orders before invoice
preparation.
Reconciling the control totals for sales invoices with the accounts
receivable subsidiary ledger.
Which of the following audit procedures would an auditor most likely perform
to test controls relating to management’s assertion concerning the completeness
of sales transactions?
A
B
C
D
Verify that extensions and footings on the entity’s sales invoices and
monthly customer statements have been recomputed.
Inspect the entity’s reports of prenumbered shipping documents that have
not been recorded in the sales journal.
Compare the invoiced prices on prenumbered sales invoices to the entity’s
authorized price list.
Inquire about the entity’s credit granting policies and the consistent
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application of credit checks.
8.
Which of the following controls most likely would assure that all billed sales are
correctly posted to the accounts receivable ledger?
A
B
C
D
9.
Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
Each sales invoice is supported by a prenumbered shipping document.
The accounts receivable ledger is reconciled daily to the control account in
the general ledger.
Each shipment on credit is supported by a prenumbered sales invoice.
An auditor tests an entity’s policy of obtaining credit approval before shipping
goods to customers in support of management’s financial statement assertion of
A
B
C
D
Valuation or allocation.
Completeness.
Existence or occurrence.
Rights and obligations.
10. Which of the following controls most likely would help ensure that all credit
sales transactions of an entity are recorded?
A
B
C
D
11.
The billing department supervisor sends copies of approved sales orders to
the credit department for comparison to authorized credit limits and
current customer account balances.
The accounting department supervisor independently reconciles the
accounts receivable subsidiary ledger to the accounts receivable control
account monthly.
The accounting department supervisor controls the mailing of monthly
statements to customers and investigates any differences reported by
customers.
The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
During the consideration of a small business client’s internal control, the auditor
discovered that the accounts receivable clerk approves credit memos and has
access to cash. Which of the following controls would be most effective in
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offsetting this weakness?
A
B
C
D
The owner reviews errors in billings to customers and postings to the
subsidiary ledger.
The controller receives the monthly bank statement directly and reconciles
the checking accounts.
The owner reviews credit memos after they are recorded.
The controller reconciles the total of the detail accounts receivable
accounts to the amount shown in the ledger.
12. When a customer fails to include a remittance advice with a payment, it is
common practice for the person opening the mail to prepare one. Consequently,
mail should be opened by which of the following four company employees?
A
B
C
D
Credit manager
Receptionist
Sales manager
Accounts receivable clerk.
13. Which of the following statements is correct concerning the use of negative
confirmation requests?
A
B
C
D
Unreturned negative confirmation requests rarely provide significant
explicit evidence.
Negative confirmation requests are effective when detection risk is low.
Unreturned negative confirmation requests indicate that alternative
procedures are necessary.
Negative confirmation requests are effective when understatements of
account balances are suspected.
14. When an auditor does not receive replies to positive requests for year-end
accounts receivable confirmations, the auditor most likely would
A
B
C
inspect the allowance account to verify whether the accounts were
subsequently written off.
increase the assessed level of detection risk for the valuation and
completeness assertions.
ask the client to contact the customers to request that the confirmations be
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returned.
D
increase the assessed level of inherent risk for the revenue cycle.
15. In confirming a client’s accounts receivable in prior years, an auditor found that
there were many differences between the recorded account balances and the
confirmation replies. These differences, which were not misstatements, required
substantial time to resolve. In defining the sampling unit for the current year’s
audit, the auditor most likely would choose
A
B
individual overdue balances.
individual invoices.
C
D
small account balances.
large account balances.
16. Confirmation is most likely to be a relevant form of evidence with regard to
assertions about accounts receivable when the auditor has concerns about the
receivables’
A
B
C
valuation
classification
existence
D
completeness
17. An auditor should perform alternative procedures to substantiate the existence of
accounts receivable when
A
B
C
D
no reply to a positive confirmation request is received.
no reply to a negative confirmation request is received.
Collectibility of the receivables is in doubt.
Pledging of the receivables is probable.
18. Which of the following procedures would an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests?
A
B
C
Review the cash receipts journal for the month prior to the year-end.
Intensify the study of internal control concerning the revenue cycle.
Increase the assessed level of detection risk for the existence assertion.
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D
Inspect the shipping records documenting the merchandise sold to the
debtors.
19. In which of the following circumstances would the use of the negative form of
accounts receivable confirmation most likely be justified?
A
B
C
D
A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to a few major customers.
A substantial number of accounts may be in dispute and the accounts
receivable balance arises from sales to many customers with small
balances.
A small number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
A small number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
20. In auditing accounts receivable, the negative form of confirmation request most
likely would be used when
A
the total recorded amount of accounts receivable is immaterial to the
financial statements taken as a whole.
B
response rates in prior years to properly designed positive confirmation
requests were inadequate.
recipients are likely to return positive confirmation requests without
verifying the accuracy of the information.
the combined assessed level of inherent risk and control risk relative to
accounts receivable is low.
C
D
21. To reduce the risks associated with accepting e-mail responses to requests for
confirmation of accounts receivable, an auditor most likely would
A
B
C
D
request the senders to mail the original forms to the auditor.
examine subsequent cash receipts for the accounts in question.
consider the e-mail responses to the confirmations to be exception.
mail second requests to the e-mail respondents.
22. Sales revenue is usually a material balance within the financial statements of a
company. Why would an auditor mainly focus his or her work on sales
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transactions occurring at the end of the year rather than throughout the year?
A
B
C
D
There are usually larger sales transactions occurring at the end of the
financial year.
The auditor is concerned that the company may attempt to bring forward
sales into the current year.
This work will provide some evidence to verify the existence of debtors.
The auditor can review these sales transactions when they actually occur
during his or her interim visit to the client.
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(II) Examination Style Questions
Question 1
The following audit procedures are often found in the testing of debtors:
(a)
(b)
(c)
(d)
(e)
Send confirmation to debtors.
Agree total of debtors subledger to debtors account.
Examine large sales invoices for two days before and after the year-end.
Enquire of management whether debtors have been sold.
Trace selected accounts from the aged trial balance to the debtors subledger for
proper amount and aging.
(f)
(g)
Test the adequacy of the allowance for bad and doubtful debts.
Examine the list of debtors for amounts due from affiliates, officers, directors or
other related parties.
(h)
Performance of alternative procedures for debtor confirmation exceptions and
non-responses.
Review of bank confirmations for any liens on receivables.
Examination of the results of the confirmations for selected debtors.
(i)
(j)
Required:
Briefly explain the audit objective of each of the audit procedures.
(20 marks)
(HKAAT Paper 8 Auditing June 2003 Q.B6)
Question 2
Audit procedures
Audit objectives
(a) Send confirmations to debtors.
(b) Trace bills of lading to sales invoices.
(c) Examine large sales invoices for two
days before and after the year-end.
(d) Enquire of management
debtors have been sold.
whether
(e) Test the adequacy of the allowance
for bad and doubtful debts.
Required:
Give the objectives or purpose of performing each of the above audit procedures.
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(HKAAT Paper 8 Auditing June 2004 Q.B5)
Question 3
During the audit of the financial statements of Oxford Ltd for the year ended 31
December 2003, the auditors selected 30 debtors for positive confirmation, including
a few overseas debtors. Before sending the debtors confirmations, the financial
controller of Oxford Ltd reviewed the list of debtors to be circularized to restrict the
auditors from sending confirmations to some sensitive accounts. Ultimately two
debtors were not circularized, both of them had credit balances.
After three weeks, 20 debtors replied and 18 of them confirmed the balances.
However, Customer X disagreed with Oxford’s balance of $3,621 and advised that the
outstanding balance should be $2,000. Customer X claimed that they had sent a
cheque of $1,621 to Oxford on 31 December 2003 and to settle an invoice for $1,621.
Customer Y also disagreed with Oxford’s balance of $4,700 and claimed that they did
not owe Oxford any amounts at 31 December 2003. The outstanding balance of
Customer Y was made up of sales invoice no. 67354 issued on 31 December 2003 on
FOB destination terms. The auditors performed alternative audit procedures on the
balances of Customer X, Customer Y, and the remaining debtors’ balances which had
been circularised but for which no reply had been received.
Required:
(a)
(b)
(c)
(d)
(e)
(f)
Discuss whether it is acceptable for the financial controller to review the list of
debtors to be circularized.
(4 marks)
What are the objectives of performing alternative audit procedures? (2 marks)
List FOUR alternative audit procedures on debtors’ confirmations for which no
reply has been received.
(4 marks)
Perform a reconciliation on the reply from Customer X and list the relevant
alternative audit procedures to be carried out by the auditors.
(4 marks)
Perform a reconciliation on the reply from Customer Y and list the relevant
alternative audit procedures to be carried out by the auditors.
(4 marks)
Why do auditors retain the envelope of confirmations received from overseas
debtors?
(2 marks)
(Total 20 marks)
(HKAAT Paper 8 Auditing December 2004 Q.B5)
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Question 4
The Financial Controller of Evan-Moor Ltd, a 6-month old company, has the
following options relating to internal controls on cash receipts.
Option I: Cheques sent by customer via mail are received by a secretary who has no
book-keeping responsibility.
Option II: Cheques sent by customers via mail are forwarded to the accounting
department directly.
In addition, the following internal controls are in place on the sales and receipts cycle
of Evan-Moor Ltd:
(i) Credit is granted by the credit department.
(ii) Sales returns are presented to the sales department.
(iii) Statements are sent monthly to customers.
(iv) Write-offs of accounts receivable are approved by the accounting supervisor.
(v) Cash is deposited with the bank weekly.
(vi) The bank reconciliation is prepared by individuals independent of the cash
receipt record keeping.
Required:
(a)
(b)
(c)
Why is it necessary to maintain segregation of duties? Give an example of
segregation of duties.
(4 marks)
Which option would you recommend to the Financial Controller? Justify
your recommendation.
(4 marks)
Classify the existing internal controls, items (i) to (vi), into the following
categories with elaborations to support your answer:
Category I – internal control strengths in the sales and receipts cycle.
Category II – internal control weaknesses in the sales and receipts cycle.
(12 marks)
(Total 20 marks)
(HKAAT Paper 8 Auditing June 2005 Q.B4)
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Question 5
(HKIAAT Paper 8 Auditing December 2005 Q.B4)
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Question 6
The following is an example of a substantive test designed to accomplish the given
audit objective:
Audit objective
Substantive test
To ensure the completeness of all Prepare a reconciliation of the payroll
payroll cheques have been properly bank statement with payroll register
processed and recorded.
payments. (Through the reconciliation
procedure, any pay cheques issued but
not recorded can be detected.
REQUIRED:
Design an efficient and effective substantive test to accomplish each of the following
audit objectives.
Audit objective
Substantive test
(a) To ensure the existence of debtors.
(b) To ensure the accuracy of the
classification of debtors’ aging.
(c) To ensure that shipments to
customers were invoiced.
(d) To ensure that the client has not
sold any of its debtors.
(e) Client has rights to debtors on the
year end debtor listing
(f) Debtors are stated at realizable
value.
(g) Cash receipts are recorded on the
correct dates.
(h) Existing sales transactions are
recorded.
(i) Sales are recorded on the correct
date
(HKIAAT Paper 8 Auditing June 2006 Q.B6 (c) & (h))
(HKIAAT Paper 8 Auditing December 2006 Q.B6 (a) & (j))
(HKIAAT Paper 8 Auditing June 2007 Q.B6 (e) to (i))
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Question 7
External confirmation is the process of obtaining and evaluating audit evidence
through a representation of information or an existing condition directly from a third
party n response to a request for information about a particular item affecting
assertions in the financial statements or related disclosures.
Required:
(a)
Other than the confirmation of accounts receivable and accounts payable
balances, give FOUR examples of situations where external confirmation
requests may be used to obtain audit evidence.
(4 marks)
(b)
What is the main objective of requesting confirmation from trade debtors? Why
such a confirmation does not provide all the necessary audit evidence relating to
the valuation assertion?
(2 marks)
(c)
Briefly explain what a blank confirmation request is. State an advantage and a
disadvantage of using a blank confirmation request.
(3 marks)
Briefly explain what a negative confirmation request is. State an advantage and
a disadvantage of using a negative confirmation request.
(3 marks)
Give THREE alternative audit procedures where no response is received to a
positive confirmation request from a trade debtor.
(3 marks)
Give Three alternative audit procedures where no response is received to a
(d)
(e)
(f)
(g)
positive confirmation request from a trade creditor.
(3 marks)
Which TWO of the following statements are incorrect?
(I) Bank confirmation can provide external audit evidence in relation to the
existence of assets.
(II) Bank confirmation can provide external audit evidence in relation to the
completeness of liabilities.
(III) Bank confirmation cannot provide external audit evidence in relation to the
valuation of assets.
(IV) Bank confirmation cannot provide external audit evidence in relation to the
valuation of liabilities.
(2 marks)
(Total 20 marks)
(HKIAAT Paper 8 Auditing December 2007 Q.B4)
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