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Aaca Receivables and Sales Reviewer
Aaca Receivables and Sales Reviewer
After the CPAs have selected particular accounts receivable for confirmation:
A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before
turning the letters over to the client to type and mail.
B. It is important that every account selected that has a material balance ultimately be verified by
confirmation or the application of alternative procedures; immaterial balances never require any follow-
up through alternative procedures.
C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and
should include a return envelope addressed to the CPA firm.
D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather
than the client.
2. Which of the following manipulations would understate receivables on the financial statements?
A. Understatement of cash sales.
B. Closing the sales journal prior to year-end.
C. Closing the cash receipts journal prior to year-end.
D. Underestimating the allowance for doubtful accounts.
3. You were surprised to note that approximately 95% of returned positive accounts receivable confirmation
requests indicated that the customers thought that they owed a larger balance than the amount that had been
printed by your client on the confirmation. This might be explained by the fact that:
A. The cash receipts journal was closed before year-end
B. The cash receipts journal was held open after year-end
C. There are many unrecorded liabilities
D. The sales journal was held open after year-end
4. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control
activities related to transactions involving the sale of goods to customers with the
A. Collection of receivables.
B. Purchase of merchandise inventory.
C. Payment of accounts payable.
D. Sale of long-term debt
5. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal
controls in the revenue cycle?
A. Merchandise received is not promptly reconciled to the outstanding purchase order file.
B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of
receivables.
6. Which of the following procedures is least likely to help auditors to assess the adequacy of management's
accounting estimate of the allowance for doubtful accounts?
A. Investigate confirmation exceptions for indication of amounts in dispute.
B. Review accounts which have been written off as uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful accounts.
7. Which of the following is consistent with effective internal control over sales transactions?
A. The accounting department prepares a shipping report authorizing the shipment of goods.
B. The accounting department accounts for all receiving reports
C. The billing department accounts for all shipping documents.
D. The accounts payable department annually approves the extension of credit to customers.
8. Tracing recorded sales transactions to the bills of lading provides evidence about the:
A. Completeness of sales transactions.
B. Collectibility of sales transactions.
C. Occurrence of sales transactions.
D. Billing of all sales transactions.
9. To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:
A. Trace a sample of the bills of lading to sales invoices
B. Confirm a sample of accounts payable
C. Review the aging of accounts receivable
D. Trace a sample of recorded sales to shipping documents
10. Which of the following generally provides the least evidence regarding the valuation of accounts receivable?
A. Reviewing an aging of accounts receivable.
B. Examination of cash receipts subsequent to the balance sheet date.
C. Confirming current (0-30 day) year-end accounts receivable.
D. Reviewing credit files for selected account.
11. Which of the following would indicate the need to use positive accounts receivable confirmations?
A. A large population consisting of small balances.
B. Good internal control over accounts receivable.
C. Most accounts are with large reputable companies.
D. A large number of accounts receivable are in dispute.
12. Which of the following is not true about the confirmation of accounts receivable?
A. Confirmation requests should bear the auditors' return address.
B. Confirmation requests should be signed by the auditors.
C. Confirmation requests should be mailed directly by the auditors.
D. Confirmation requests should include a return envelope addressed to the office of the auditors.
13. Which of the following is not true about the auditors' verification of notes receivable?
A. The interest revenue on notes receivable is usually audited by independent computation.
B. Inspecting the notes is sufficient evidence of existence of the notes.
C. The auditors may evaluate the collectibility of notes by inspecting credit files.
D. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of
cash balances.
14. To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be
completed on a representative sample drawn from:
A. The sales journal
B. The billing clerk's file of sales orders
C. Duplicate copies of sales invoices
D. The shipping clerk's file of duplicate copies of bills of lading
15. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the
following, which combination is it most likely that the auditors will use?
A. The positive form for small balances, and the negative form for large balances.
B. The positive form used for large balances and the negative form for the small balances.
C. The positive form used for trade receivables and the negative form for other receivables.
D. The positive form when controls related to receivables are satisfactory, and the negative form when
controls related to receivables are unsatisfactory.
16. The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests.
Under which of the following circumstances might the negative form of the accounts receivable confirmation be
useful?
A. A substantial number of accounts are in disputes.
B. The combination of inherent risk and control risk is high.
C. Client records include a large number of relatively small balances.
D. The auditors believe that recipients of the requests are unlikely to give them consideration.
17. When scheduling the audit work to be performed on an engagement, the auditors should consider confirming
accounts receivable balances at an interim date if:
A. Subsequent collections are to be reviewed.
B. Internal control over receivables is good. (If not good, at year end)
C. Negative confirmations are to be used.
D. There is a simultaneous examination of cash and accounts receivable.
18. It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such
situations the best alternative procedure the auditors might resort to would be:
A. Examining subsequent receipts of year-end accounts receivable.
B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent
date.
C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to
some percentage of the balance in those accounts that cannot be confirmed.
D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.
19. 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 auditors to:
A. Consider internal control over credit sales.
B. Test the accuracy of recorded charge sales.
C. Estimate credit losses.
D. Verify the validity of the recorded receivables.
20. Which of the following is not a primary objective of the auditors in the examination of accounts receivable?
A. Determine the approximate realizable value.
B. Consider the adequacy of internal control.
C. Establish the existence of receivables.
D. Determine the expected day of collection of each of the receivables.
21. Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money"
environment, the CPA would be likely to:
A. Increase the balance in the allowance for bad debts accounts.
B. Review the going concern ramifications.
C. Review the credit and collection policy.
D. Expand tests of collectibility.
22. Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good
internal control?
A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary
ledger.
B. Posting to the general ledger and approval of additions and terminations relating to the payroll.
C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger.
D. Collection of receipts on account and maintaining accounts receivable records.
23. Tracing copies of sales invoices to shipping documents will provide evidence that all
A. Shipments to customers were recorded as receivables.
B. Billed sales were shipped. (Occurrence)
C. Debits to the subsidiary accounts receivable ledger are for sales shipped.
D. Shipments to customers were billed.
24. Which of the following is the best argument against the use of negative accounts receivable confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients received them.
C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
D. The inference drawn from receiving no reply may not be correct.
25. When there are a large number of relatively small account balances, negative confirmation of accounts
receivable is feasible if the combination of inherent risk and control risk is:
A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate
consideration.
B. High, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.
C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate
consideration.
D. Low, and the individuals receiving the confirmation requests are likely to give them adequate
consideration.
26. An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
A. No reply to a positive confirmation request is received.
B. No reply to a negative confirmation request is received.
C. Collectibility of the receivables is in doubt.
D. Pledging of the receivables is probable.
27. Johnson is engaged in the audit of a utility which supplies power to a residential community. All accounts
receivable balances are small and internal control is effective. Customers are billed bi-monthly. In order to
determine the validity of the accounts receivable balances at the balance sheet date, Johnson would most likely:
A. Examine evidence of subsequent cash receipts instead of sending confirmation requests.
B. Send positive confirmation requests.
C. Send negative confirmation requests.
D. Use statistical sampling instead of sending confirmation requests.
28. A CPA examines a sample of copies of December and January sales invoices for the initials of the person who
verified the quantitative data. This is an example of a:
A. Test of a control.
B. Substantive test.
C. Cutoff test.
D. Statistical test.
29. Which of the following is not one of the criteria for revenue recognition?
A. Collectibility is certain.
B. Delivery has occurred or services have been rendered.
C. Evidence of an arrangement exists and is persuasive.
D. A fixed or determinable price to buyer exists.
30. In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from
the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were
booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most
likely?
A. Fictitious revenues
B. Timing differences
C. Improper asset valuations
D. Improper disclosures
31. Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial
statements for all of the following except:
A. It understates liabilities.
B. It overstates revenues
C. It overstates net income.
D. It overstates assets.
32. Which of the following revenue related transactions is not linked to the accounts indicated?
A. Recognize revenues too early--accounts receivable and revenue.
B. Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts.
C. Don't write off uncollectible receivables--sales returns, sales discounts.
D. Don't record discounts given to customers--Cash, sales discounts, accounts receivable.
33. An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than
for the prior year. This may indicate that
A. Obsolete inventory has not yet been reduced to fair market value.
B. There was an improper cutoff of sales at the end of the year.
C. An unusually large receivable was written off near the end of the year.
D. The aging of accounts receivable was improperly performed in both years.
34. Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the
prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained
about the same. Which of the following client explanations would satisfy the auditor?
A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category
than in the prior year.
B. Internal control activities over the recording of cash receipts have been improved since the end of the
prior year.
C. The client opened a second retail outlet during the current year and its credit sales approximately
equaled the older outlet.
D. The client tightened its credit policy during the current year and sold considerably less merchandise to
customers with poor credit ratings.
36. An audit basically consists of having the auditor form an opinion regarding management's financial statement
assertions. The auditor therefore develops general and specific program steps to apply to the accounts and
transactions. In a particular case, s/he might do this by:
A. Tracing sales invoices to shipping documents to test the completeness of reported sales
B. Tracing shipping documents to sales invoices to test the occurrence of reported sales
C. Tracing sales invoices to shipping documents to test occurrence of reported sales
D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable
37. Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously
been recorded twice?
A. Footing the sales journal.
B. Sending accounts receivable confirmations.
C. Tracing the total sales in the sales journal to the general ledger.
D. Observation of the physical inventory count at year-end.
38. For effective internal control, the billing function should not be performed by the:
A. Sales department
B. Accounting department
C. Finance department
D. Information processing department
39. Which of the following is most likely to be used in determining a proper amount to be included in the allowance
for doubtful accounts?
A. Accounts receivable divided by cost of goods sold.
B. Aging of accounts receivable.
C. Cash Sales divided by Accounts receivable
D. Year 2 accounts receivable compared to year one accounts receivable.
40. Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?
A. Examine cash receipts received after year-end.
B. Confirm receivables.
C. Examine dates of purchase orders.
D. Foot the receivables lead schedule.
41. A client might overstate December 31 accounts receivable balances by dating and recording January
transactions in December. Such entries recorded in which journal are most likely to achieve this end?
A. Cash receipts.
B. Payroll.
C. Purchases.
D. Sales.
42. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal
control over the revenue cycle?
A. Fictitious transactions may be recorded that cause an understatement of revenues and an
overstatement of receivables.
B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in
other customers' accounts permitting a misappropriation of cash.
C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of
cash.
D. The failure to prepare shipping documents may lead to an understatement of inventory balances.
43. Which of the following is not typically considered to be an alternate procedure for handling nonreplies to
accounts receivable confirmations?
44. A, Examine sales invoices.
45. B. Inclusion of the information in the engagement letter.
46. C. Examine correspondence
47. D. Examine any subsequent cash receipts
48. What type of error is the CPA must likely to discover when he/she examines all shipping reports date in January
of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 credit sales?
A. Accounts receivable are overstated at December 31, 20X0
B. Accounts receivable are understated at December 31, 20X0
C. Operating expenses are overstated for the 12 months ended December 31, 20X0
D. Sales returns and allowance are overstated at December 31, 20X0
49. When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect
with respect to the auditors' confirmation of receivables?
A. The account balances as of year-end will generally be confirmed. (Positive confirmation)
B. The auditors will in general use blank rather than positive confirmation requests.
C. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and
as of year end.
D. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors'
invoices, purchase orders and receiving reports.
50. Which of the following would be least likely to diminish the validity of evidence obtained through confirmation
of accounts receivable?
A. The confirmations are sent on the client's letterhead.
B. The confirmations are mailed to customers by the internal auditors.
C. The client's mailroom personnel closely monitor and inspect confirmations during mailing.
D. The return address on the envelope used to send the confirmation request is that of the client.
51. Your client performed the physical count of inventory as of November 30, one month prior to year-end.
Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those
two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which
of the following is most likely to be overstated relating to the year XX financial statements?
A) Sales. (understated)
B) Cash. (no effect)
C) Inventory.
D) Accounts receivable. (understated)
52. Which of the following is least likely to be typically considered to be an alternate procedure for handling
nonreplies to accounts receivable confirmations?
A. Examine bills of lading
B. Physically examine items sold
C. Examine correspondence
D. Examine subsequent cash receipts
53. To test the existence assertion for recorded receivables, an auditor would select a sample from the:
A. Sales order file
B. Customer purchase orders
C. Accounts receivable subsidiary ledger
D. Shipping documents (bills of lading) file.
54. Which of the following is not an overall objective of the auditor in the audit of revenues?
A. To verify cash deposited during the year.
B. To obtain an understanding of internal control and assess the risks of material misstatement, with
particular emphasis on the use of accrual accounting to record revenue.
C. To verify that earned revenue has been recorded and recorded revenue has been earned.
D. To identify and interpret significant trends and variations in the amounts of various categories of
revenue.
55. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?
A. Equipment.
B. Bonds payable.
C. Bank charges.
D. Sales.
56. Auditors are often concerned with the possibility of overstatement of sales and receivables. However,
management may also have reasons for understating these balances. Which of the following would explain
understatement of sales and receivables?
A. To window-dress the financial statements.
B. To avoid paying taxes.
C. To meet budgets and forecasts.
D. All of the answers are correct.
57. An auditor most likely will review an entity's periodic accounting for the numerical sequence of shipping
documents and invoices to support management's financial statement assertion of
A. Occurrence.
B. Rights and obligations.
C. Valuation and allocation.
D. Completeness.
58. An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed
evidence of follow-up on the errors reported by the customers. This test of controls was most likely performed
to support management's financial statement assertion(s) of
I. Classification and Understandability
60. Which of the following might be detected by an auditor's review of the client's sales cutoff?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year-end accounts receivable.
D. Inflated sales for the year.
61. An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last
month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following
approaches would be most effective concerning the timing of audit procedures for revenue?
A. The auditor should perform analytical procedures at an interim date and discuss any changes in the level
of sales with senior management.
B. The auditor should inspect transactions occurring in the last month of the fiscal year and review the
related sale contracts to determine that revenue was posted in the proper period.
C. The auditor should perform tests of controls at an interim date to obtain audit evidence about the
operational effectiveness of internal controls over sales.
D. The auditor should review period-end compensation to determine if bonuses were paid to meet
earnings goals.
62. The auditor finds a situation in which one person has the ability to collect receivables, make deposits, issue
credit memos, and record receipt of payments. The auditor suspects the individual may be stealing from cash
receipts. Which of the following audit procedures will be most effective in discovering fraud in this scenario?
A. Send positive confirmations to a random selection of customers.
B. Send negative confirmations to all outstanding accounts receivable customers.
C. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts,
excluding cash posted to the cash receipts journal.
D. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash
receipts journal.
63. A large university has relatively ineffective internal control. The university's auditor seeks assurance that all
tuition revenue has been recorded. The auditor could best obtain the desired assurance by
A. Confirming a sample of tuition payments with the students.
B. Observing tuition payment procedures on a surprise basis.
C. Comparing business office revenue records with registrar's office records of students enrolled.
D. Preparing a year-end bank reconciliation.
64. One objective of an audit of a water utility for a small city is to determine whether all customers are being billed.
The best direction of testing is from the
A. Meter department records to the sales register.
B. Sales register to the meter department records.
C. Accounts receivable ledger to the sales register.
D. Sales register to the accounts receivable ledger.
65. If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most
likely would trace transactions from the
A. Sales invoices to the shipping documents.
B. Cash receipts journal to the sales journal.
C. Shipping documents to the sales invoices. (Completeness)
D. Sales journal to the cash receipts journal.
66. If the objective of a test of details of transactions is to detect overstatements of sales, the auditor's direction of
testing should be from the
A. Cash receipts journal to the sales journal.
B. Sales journal to the cash receipts journal.
C. Source documents to the accounting records.
D. Accounting records to the source documents (Occurrence)
67. An inappropriate audit procedure relative to accounts receivable is to determine that the
A. Accounts exist and are properly valued.
B. Accounts represent the complete transaction process.
C. Accounts are collected by the balance sheet date.
D. Client has rights in the accounts receivable.
68. Which of the following will most likely give the most assurance concerning the valuation assertion about
accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness
69. A company has computerized sales and cash receipts journals. The computer programs for these journals have
been properly debugged. The auditor discovered that the total of the accounts receivable subsidiary accounts
differs materially from the accounts receivable control account. This discrepancy could indicate
A. Credit memoranda being improperly recorded.
B. Lapping of receivables.
C. Receivables not being properly aged.
D. Statements being intercepted prior to mailing.
70. An auditor learns that collections of accounts receivable during the last 10 days of December were not recorded.
The effect will be to
A. Leave both working capital and the current ratio unchanged at December 31.
B. Overstate both working capital and the current ratio at December 31.
C. Overstate working capital with no effect on the current ratio at December 31.
D. Overstate the current ratio with no effect on working capital at December 31.
Working capital is equal to current assets minus current liabilities, and the current ratio is equal to
current assets divided by current liabilities. Because cash and accounts receivable are both current
assets, the error has no effect on working capital and the current ratio at December 31 because it
did not change total current assets.
71. Which of the following procedures will an auditor most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies to second requests?
A. Review the cash receipts journal for the month prior to year end.
B. Intensify the study of internal control concerning the revenue cycle.
C. Increase the assessed level of detection risk for the existence assertion.
D. Inspect the shipping records documenting the merchandise sold to the debtors
72. Which of the following is the greatest drawback (disadvantage) of using subsequent collections evidenced only
by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are
not received?
A. Checking of subsequent collections can never be used as an alternative auditing procedure.
B. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable
at the balance sheet date or a subsequent transaction.
C. A deposit slip is not received directly by the auditor.
D. A customer may not have made a payment on a timely basis.
73. The most effective audit procedure for determining the collectibility of an account receivable is the
A. Confirmation of the account.
B. Examination of the related sales invoice(s).
C. Review of the subsequent cash collections.
D. Review of authorization of credit sales to the customer and the previous history of collections.
74. All of the following are examples of substantive tests to verify the valuation of net accounts receivable except
the
A. Recomputation of the allowance for bad debts.
B. Inspection of accounts for current versus noncurrent status in the statement of financial position.
C. Inspection of the aging schedule and credit records of past due accounts.
D. Comparison of the allowance for bad debts with past records.
75. Once an auditor has determined that accounts receivable have increased because of slow collections in a tight
money environment, the auditor is likely to
A. Increase the balance in the allowance for bad debts account.
B. Review the going concern ramifications.
C. Review the credit and collection policy.
D. Expand tests of collectibility.
76. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account
as of October 31. By this procedure, the auditor is most likely to learn of which of the following?
A. An October invoice was improperly computed.
B. An October check from a customer was posted in error to the account of another customer with a
similar name.
C. An opening balance in a subsidiary ledger account was improperly carried forward from the previous
accounting period.
D. An account balance is past due and should be written off.
77. An auditor suspects that a client's customer, whose accounts receivable balance represents a material
proportion of the client's total receivables, is fictitious. The evidence that provides the strongest proof that the
auditor's suspicion is unfounded, given the existence of weaknesses in the client's internal control over accounts
receivable, is
A. Receipt of a positive confirmation response.
B. Subsequent posting of the collection of the account balance.
C. Nonresponse to a negative confirmation request.
D. Location of the customer's name and address in a published industry directory
78. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year
end if
A. Positive confirmations sent to debtors are not returned.
B. Negative confirmations sent to debtors are not returned.
C. Most of the returned negative confirmations indicate that the debtor owes a larger balance than the
amount being confirmed.
D. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the
amount being confirmed.