Vines VII Audit of Receivables OCAMPO/ OCAMPO PROBLEM NO. 22 - Substantive audit procedures for receivables Select the best answer for each of the following: Which of the following may i € y be considered to be a prim: jectit ve elastin the examination of accounts receivable? ae _ Determine approximate time of collectibility of receivabl b. "Determine the relationship of receivables alee Ge 5 Determine the reasonableness of the sales figure. d. Establish validity and collectibility of receivables. 1, Which of the following is not a procedure used by an auditor in the 2. examination of accounts receivable? a. Confirmation b- Reconciliation c. Inquiry. d. Physical count and inspection 3. In determining validity of accounts receivable, which of the following would the auditor consider most reliable? a. Direct telephone ‘communication between auditor and debtor. b. Confirmation replies received directly from. customers. cc... Credits to accounts. ‘receivable from the cash receipts book after the close of business at year end. d. Documentary evidence that supports the accounts receivable balance. 4. Which of the following forms of evidence represents the most ble actually exists? competent evidence that a receival a. A positive confirmation b. A sales invoice c...A receiving report d...A bill of lading 5. Confirmation, which is a specific type of inquiry, is the process of ‘om of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances, provides primary evidence are ; a. Completeness and valuation b. Valuation and rights and obligations 345Vil - Audit of Receivables c. d. OCAMPO/OCAMPo, Existence and completeness _ Rights and obligations and existence 6. Which of the following audit objectives is not served by confirming customers’ accounts receivable? a. b. c d. Sales and accounts receivable cutoff. Completeness of customers represented in the accounts receivable trial balance. Valuation of accounts receivable as of period end. Existence of customers represented in the accounts receivable trial balance. 7, An auditor should perform alternative procedures to substantiate the existence of accounts receivable when a. b. c. d. Pledging of the receivables is probable. No reply to a negative confirmation request is received. No reply to a positive confirmation request is received. Collectibility of the receivables is in doubt. 8. 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. d. Review the cash receipts journal for the month prior to year- end. Inspect the shipping records documenting the merchandise sold to the debtors. Intensify the study of internal control concerning the revenue cycle. Increase the assessed level of detection risk for the existence assertion 9. The auditor should use positive confirmation of accounts receivable a. b. c d. When internal controls over the receivables process are believed to be strong. ran the possibility of disputes in the accounts is greater than usual. For individual account balances that are immaterial in amount. When variables estimation sampling techniques are not used. 346vil - Audit of Receivables 10. 11. 12. OCAMPO/OCAMPO: The negative form of accounts receivable i i particularly useful except when Seat. a. Individual account balances are relatively large. b. Internal control surrounding accounts receivable is considered to be effective. c. A large pumber of small balances are involved. d, The auditor has reason to believe the persons receiving the request are likely to give them consideration. Which of the following statements is correct concerning the use of negative confirmation requests? a. Negative confirmation requests are effective when detection risk is low. b. Negative confirmation requests are — effective when understatements of account balances are suspected. Unreturned negative confirmation. requests rarely provide significant explicit evidence. d. Unreturned negative confirmation requests indicate that alternative procedures are necessary. c. ‘An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of a: Valuation b. Completeness c. Existence or occurrence d. Rights and obligations Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a. Confirm a sample of recorded receivables by’ direct communication with the debtors. b. Observe the client's distribution of payroll checks. c. Compare a sample of shipping documents to related sales invoices. - i d, Review standard bank ‘confirmations for indications of kiting.OCAMPO, VIl- Audit of Receivables CAME wpa, ing sales transactions. One step is to trace 14, An auditor debit eae from the accounts reccivable subsidiany a to the supporting eee cs What would the syaitor i blish by this step auditor intend to estal iar invoices represent bona fide sales. ts b. Debit veawes inthe accounts receivable subsidiary ledger ae ‘ properly supported by sales invoices. c, Allsales invoices have been recorded. a. All sales invoices have been properly posted to customer accounts. ing bills of lading to sales invoices provides evidence that ie ea seea to cunomels were recorded as sales, b. Shipments to customers were invoiced, ¢. Recorded sales were shipped. d. Invoiced sales were shipped. 16, When the objective of the. auditor is to evaluate the appropriateness of adjustments to sales, the best available evidence would normally be a. Documentary evidence obtained by inspecting documents supporting entries to adjustment accounts. b. Oral evidence obtained by discussing adjustment-relate procedures with controller personnel. c. Analytical evidence obtained by comparing sales adjustments to gross sales for a period of time. d. Physical evidence obtained by inspection of goods returned for credit. 17..Which source document should an auditor use to verify the correct sales date for an item sold FOB shipping point? a. .Customer's purchase order. b. Customer's payment document c. Carrier's bill of lading d. Sales invoice 18. An auditor would primarily rely upon which type of evidential matter when evaluating the collectibility of accounts receivable? a. Negative confirmation b. Positive confirmation c. Management's representations d. Aged accounts receivable listing 348Br i VII - Audit of Receivables OCAMPO/OCAMPO 19. An aged trial balance of accounts receivable is usually used by the auditor to a. Evaluate the results of compliance tests. b, _ Evaluate the provision for bad debt expense, .¢, Verify the validity of recorded Teceivables, | d. Ensure that all accounts are promptly credited. 20. Which account balance is most likely to be misstated if an aging of accounts receivable is not performed? a. Accounts receivable b. Allowance for bad debts c. Sales revenue d. Sales returns and allowances 21.When auditing the allowance for uncollectible accounts, the least reliance should be placed on which of the following? a. Ratios that show the past relationship of the allowance to net credit sales. b. Collection experience of the client's collection agency. ¢. The credit manager's opinion. d. An aging of past due accounts. 22, Which of the following analytical audit findings would most likely indicate a possible problem? a. A material increase in the acid test ratio. b. A material increase in inventory turnover. c. A material decrease in the receivables turnover. d. A material decrease in days’ sales outstanding. 23.An auditor's preliminary analysis of accounts receivable revealed the following turnover rates: Year 3 Year 2 ‘ear 1 4.3 6. 7.3 - Which of the following is the most likely cause of the decrease in accounts receivable turnover? a. Increase in the cash discount offered. b. Increased cash sales. ©. Liberalization of credit policy. 4d. Shortening of due-date terms. 349‘24. 25, 26. 27. Pe , OCAMPO, Audit of Receivables / OCAMPo i iti firmation of accounts receivable as of the end Ha neasting period, approximately 95% of the confirmation letters returned, indicated that the customer owed a smaller balance than the amount for confirmation, This might be explained by the fact Ke sales journal was closed prior to year-end. b. The sales journal was held open after year-end. c. There is a large number of unrecorded sales, d. The cash receipts journal was held open after year-end. The retention of cash receipts without an entry being made in the books until a subsequent cash receipt is received from which the cashier pays the preceding amount retained. a. Lapping b. Kiting c.. Cash shorting d. Misappropriating. Lapping may most likely be detected by a. Careful comparison of the detailed entries on remittance lists and duplicate deposit slips with the cash receipts book. b. Surprise count of cash on hand. ¢. Scrutiny of the cutoff bank balance. d. A review of sales discounts. An auditor who wishes to substantiate the gross balance of the account “Trade Notes Receivable” is considering the advisability of performing the four procedures listed below. Which pair of procedures is best suited to this objective? 1... Age the receivables. Il. Confirm the notes with the makers, lll. Inspect the notes. IV..Trace a sample of Postings from the sales journal to the notes Teceivable ledger, a. land Ill b. Iand nr c. land Iv d. Wand Ivyii- Audit of Receivables OCAMPO/OCAMPO Which of the following audit proce it ie 8 about the collectibiity of hotes ome ee Examination, of cash receipts i ee Tecat and frincipal Seen? to determine promptness Reconciliation of the detail of notes receivable and the provision for uncollectible amounts to the general ledger control. Confirmation of note receivable balances with the debtors. Examination of notes for appropriate debtors’ signatures. a. b. c d. 29. Which of the following statements regarding the audit of negotiable notes receivable is not correct? a. Materiality of the amount involved is a factor considered when selecting the accounts to be confirmed. b. The auditor should confirm all notes receivable as of the end of the reporting period. c. Physical inspection of conclusive evidence. d. Notes receivable discot f a note by the auditor does not provide unted with recourse need to be confirmed. stantive test for accrued interest receivable would be to 30. A logical sub: a. Verify the cost, carrying value, and market value of notes receivable. by a calculation based on the face b. Verify the interest income amount of notes and the nominal interest rate. c. Recalculate interest earned and compare it to the amounts received. ‘ d. Compare the interest income with published interest investment records. 351