Audit of Cash

CPA MULTIPLE CHOICE QUESTIONS -- Testing

1. An auditor confirms a representative number of A/R and investigates respondents
exceptions and comments. By this procedure the auditor would be most likely to learn
which of the following?
a) One of the cashiers has been engaged in lapping.
b) One of the sales clerks has not been preparing charge slips for credit sales to family and
friends.
c) The EDP control clerk has been removing all sales invoices applicable to his account
from the data file.
d) The credit manager has misappropriated remittances from customers whose accounts
have been written-off.

2. Customers having substantial year-end past due balances fail to reply after second
request forms have been mailed directly to them. Which of the following is the most
appropriate audit procedure?
a) Examine shipping documents.
b) Review collections during the year being examined.
c) Intensify the study of the client's internal control system with respect to receivables.
d) Increase the balance in the accounts receivable allowance (contra) account.

3. To determine that sales transactions have been recorded in the proper accounting
period, the auditor performs a cut-off review. Which of the following best describes the
overall approach used when performing a cut-off review?
a) Ascertain that management has included in the representation letter a statement that
transactions have been accounted for in the proper accounting period.
b) Confirm year-end transactions with regular customers.
c) Examine cash receipts in the subsequent period.
d) Analyze transactions occurring within a few days before and after year-end.

4. The confirmation of the client's trade accounts receivable is a means of obtaining

evidential matter and is specifically considered to be generally accepted auditing
a) Principle.
c) Procedure.
b) Standard.
d) Practice.

5. Approximately 95% of returned accounts receivable confirmations indicated that the

customer owed a smaller balance than the amount confirmed. This might be explained by
the fact that
a) The cash receipts journal was held open after year-end.
b) There is a large number of unrecorded liabilities.
c) The sales journal was closed prior to year end.
d) The sales journal was held open after year-end.

6. Which of the following is not a principal objective of the auditor in the examination of
revenues?
a) To verify cash deposited during the year.
b) To evaluate internal control, 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.

7. Which of the following procedures would ordinarily be expected to best reveal

unrecorded sales at the balance sheet date?
a) Compare shipping documents with sales records.
b) Apply gross profit rates to inventory disposed of during the period.
c) Trace payments received subsequent to the balance sheet date.
d) Send accounts receivable confirmation requests.

8. If accounts receivable turned over 7.1 times in 1979 as compared to only 5.6 times in
1980, it is possible that there were
a) Unrecorded credit sales in 1980.
b) Unrecorded cash receipts in 1979.
c) More thorough credit investigations made by the company late in 1979.
d) Fictitious sales in 1980.

9. Lapping would most likely be detected by

a) Examination of canceled checks clearing in the bank cut-off period.
b) Confirming year-end bank balances.
c) Preparing a schedule of interbank transfers.
d) Investigating responses to accounts receivable confirmations.

10. When there are a large number of relatively small account balances, negative
confirmation of A/R is feasible if I/C is
a) Strong, and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration.
b) Weak, and the individuals receiving the confirmation requests are likely to give them
adequate consideration.
c) Weak, and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration
d) Strong, and the individuals receiving the confirmation requests are likely to give them
adequate consideration.

11. An examination of the A/P account is ordinarily not designed to

a) Detect accounts payable which are substantially past due.
b) Verify that accounts payable were properly authorized.
c) Ascertain the reasonableness of recorded liabilities.
d) Determine that all existing liabilities at B/S date are recorded.

12. When title to merchandise in transit has passed to the audit client, the auditor engaged
in the performance of a purchase cutoff will encounter the greatest difficulty in gaining
assurance with respect to the
a) Quantity.
b) Quality
c) Price.
d) Terms.

13. Auditor confirmation of A/P balances may not be necessary because

a) This is a duplication of cutoff tests.
b) A/P balances may not be paid before the audit is completed.
c) Correspondence with the audit client's attorney will reveal all legal action by vendors for
non-payment.
d) There is likely to be other reliable external evidence available to support the balances.

14. Which of the following would detect an understatement of a purchase discount?

a) Verify footing and crossfooting of purchases and disbursements.
b) Compare purchase invoice terms with disbursement records and checks.
c) Compare approved purchase orders to receiving reports.
d) Verify the receipt of items ordered and invoiced.

15. Which of the following is one of the better auditing techniques that might be used by an
auditor to detect kiting?
a) Review composition of authenticated deposit slips.
b) Review subsequent bank statements and canceled checks received directly from the
bank.
c) Prepare a schedule of bank transfers from the client's books.
d) Prepare year-end bank reconciliations.

16. Sorry, I couldn't transfer #16.

17. When auditing merchandise inventory at year-end, the auditor performs a purchase
cutoff test to obtain evidence that
a) All goods purchased before year-end are received before the physical inventory count.
b) No goods held on consignment for customers are included in the inventory balance.
c) No goods observed during the physical count are pledged or sold.
d) All goods owned at year-end are included in the inventory balance.

18. On receiving the bank cutoff statement, the auditor should trace
a) Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts
journal.
b) Checks dated prior to year-end to the outstanding checks listed on the year-end bank
reconciliation.
c) Deposits listed on the cutoff statement to deposits in the cash receipts journal.
d) Checks dated subsequent to year-end to the outstanding checks listed on the year-end
bank reconciliation.
19. An auditor ordinarily should send a standard confirmation request to all banks with
which the client has done business during the year under audit, regardless of the year-end
balance, because this procedure
a) Provides for confirmation regarding compensating balance arrangements.
b) Detects kiting activities that may otherwise not be discovered.
c) Seeks information about indebtedness to the bank.
d) Verifies securities held by the bank in safekeeping.

20. Which of the following is the best audit procedure for determining the existence of
unrecorded liabilities at year-end?
a) Examine a sample of invoices dated a few days prior to and subsequent to year-end to
ascertain whether they have been properly recorded.
b) Examine a sample of cash disbursements in the period subsequent to year-end.
c) Examine confirmation requests returned by creditors whose accounts appear on a
subsidiary trial balance of A/P.
d) Examine unusual relationships between monthly accounts payable balances and
recorded purchases.

21. Instead of taking a physical count on the balance sheet date, the client may take
physical counts prior to the year-end if internal controls are adequate and
a) Computerized records of perpetual inventory are maintained.
b) Inventory is slow-moving.
c) EDP error reports are generated for missing prenumbered inventory tickets.
d) Obsolete inventory items are segregated and excluded.

22. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listing to obtain evidence that all items
a) Included in the listing have been counted.
b) Represented by inventory tags are included in the listing.
c) Included in the listing are represented by inventory tags.
d) Represented by inventory tags are bona fide.

23. In verifying debits to perpetual inventory records of a non-manufacturing company,

the auditor would investigate the
a) Purchase journal.
b) Purchase requisitions.
c) Purchase orders.
d) Vendors invoices.

24. An auditor would be most likely to learn of slow-moving inventory through

a) Inquiry of sales personnel.
b) Inquiry of stores' personnel.
c) Purchase orders.
d) Review of perpetual inv. records.

25. A client's physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the results of the failure to record
a) Sales.
b) Sales Discounts.
c) Purchases.
d) Purchase returns.

26. A common audit procedure in the audit of payroll transactions involves tracing selected
items from the payroll journal to employee time cards that have been approved by
supervisory personnel. This procedure is designed to provide evidence in support of the
audit proposition that
a) Only bona fide employees worked and their pay was properly computed.
b) Jobs on which employees worked were charged with the appropriate labor cost.
c) Internal controls relating to payroll disbursements are operating effectively.
d) All employees worked the number of hours used to compute their pay.

27. A bookkeeper perpetrated a theft by preparing erroneous W-2 forms. The

bookkeeper's FICA withheld was overstated by $500.00 and the FICA withheld from all
other employees was understated. Which of the following is an audit procedure which
would detect such a fraud?
a) Multiplication of the applicable rate by the individual gross taxable earnings.
b) Utilizing form W-4 and withholding charts to determine whether deductions authorized
per pay period agree with amounts deducted per pay period.
c) Footing and crossfooting of the payroll register followed by tracing postings to the
general ledger.
d) Vouching canceled checks to federal tax forms 941.

28. In testing the payroll of a large company, the auditor wants to establish that the
individuals included in a sample actually were employees of the company during the period
under review. What will be the best source to determine this?
a) Telephone contacts with the employees.
b) Tracing from the payroll register to the employees' earnings records.
c) Confirmation with the union or other independent organizations.
d) Examination of personnel department records.

29. A surprise observation by an auditor of a client's regular distribution of payroll checks

is primarily designed to satisfy the auditor that
a) All unclaimed payroll checks are properly returned to the cashier.
b) The paymaster is not involved in the payroll distribution.
c) All employees have in their possession proper employee ID.
d) Names on the company payroll are those of bona fide employees presently on the job.

30. An auditor decides that it is important and necessary to observe a client's distribution
of payroll checks on a particular audit. The client organization is so large that the auditor
cannot conveniently observe the distribution of the entire payroll. In these circumstances,
which of the following is most acceptable to the auditor?
a) Observation should be limited to one or more selected departments.
b) Observation should be made for all departments regardless of the inconvenience.
c) Observation should be eliminated and other alternative auditing procedures should be
utilized to obtain satisfaction.
d) Observation should be limited to those departments where employees are easily
available.

31. In an audit of inventories, an auditor would least likely verify that

a) All inventory owned by the clients is on hand at the time of the count.
b) The client has used proper inventory pricing.
c) The financial statement presentation of inventories is appropriate.
d) Damaged goods and obsolete items have been properly accounted for.

32. When auditing prepaid insurance, an auditor discovers that the original insurance
policy on plant equipment is not available for inspection. The policy's absence most likely
indicates the possibility of a(an)
a) Insurance premium due but not recorded.
b) Deficiency in the coinsurance provision.
c) Lien on the plant equipment.
d) Understatement of insurance expense.

33. A client maintains perpetual inventory records in both quantities and dollars. If the
assessed level of control risk is high, an auditor would probably
a) Insist that the client perform physical counts of inventory items several times during the
year.
b) Apply gross profit tests to ascertain the reasonableness of the physical counts.
c) Increase the extent of tests of controls of the inventory cycle.
d) Request the client to schedule the physical inventory count at the end of the year.

34. An auditor should trace bank transfers for the last part of the audit period and first
part of the subsequent period to detect whether
a) The cash receipts journal was held open for a few days after the year end.
b) The last checks recorded before the year end were actually mailed by the year end.
c) Cash balances were overstated because of kiting.
d) Any unusual payments to or receipts from related parties occurred.

35. Periodic or cycle counts of selected inventory times are made at various times during
the year rather than single inventory count at year end. Which of the following is necessary
if the auditor plans to observe inventories at interim dates?
a) Complete recounts by independent teams are performed.
b) Perpetual inventory records are maintained.
c) Unit cost records are integrated with production accounting records.
d) Inventory balances are rarely at low levels.

36. An auditor most likely would extend substantive tests of payroll when
a) Payroll is extensively audited by the state government.
b) Payroll expense is substantially higher than in the prior year.
c) Overpayments are discovered in performing tests of details.
d) Employees complain to management about too much overtime.

Answers - Testing Questions

1.         A
2.         A
3.         D
4.         C
5.         D
6.         A
7.         A
8.         D
9.         D
10.       D
11.       B
12.       B
13.       D
14.       B
15.       B
16.       B
17.       D
18.       B
19.       C
20.       B
21.       A
22.       B
23.       D
24.       D
25.       C
26.       D
27.       A
28.       D
29.       D
30.       A
31.       A
32.       C
33.       D
34.       C
35.       B
36.       C

Chapter 16

Multiple-Choice Questions
1. Which of the following is not a balance-related audit objective evaluated in
easy the audit of accounts receivable?
a a. Timing
b. Realizable value
c. Completeness
d. Accuracy

2. The two primary classes of transactions in the sales and collection cycle
are:
easy a. sales and sales discounts.
b b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.

3. The appropriate evidence to be obtained from tests of details must be

decided on a(n):
easy a. efficiency basis.
c b. effectiveness basis.
c. audit objectives basis.
d. none of the above.

4. Which of the following is not a balance-related audit objective evaluated in

easy the audit of accounts receivable?
a a. Occurrence
b. Completeness
c. Rights
d. Accuracy

5. Tests of which balance-related audit objective are normally performed first

easy in an audit of the sales and collection?
d a. Accuracy
b. Completeness
c. Rights
d. Detail tie-in

6. For most audits, inherent risk for accounts receivable is moderate or low
easy except for which balance-related audit objectives?
d a. Timing and realizable value.
b. Completeness and existence.
c. Existence and accuracy.
d. Realizable value and cutoff.

7. Which of the following types of receivables would not deserve the special
easy attention of the auditor?
d a. Accounts receivables with credit balances.
 b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

8. A listing of the balances in the accounts receivable master file at the

easy balance sheet date, by total balance outstanding and by the amount of time
b the component parts have been outstanding, is the:
a. customer list.
b. aged trial balance.
c. accounts receivable ledger.
d. schedule of accounts receivable.

9. Testing the information on the aged trial balance for detail tie-in is a
easy necessary audit procedure, which would normally include:
a
Test-footing the total
column and the columns Comparing the total of the aged trial
depicting the aging balance with the general ledger
accounts receivable account
a. Yes Yes
b. No No
c. Yes No
d. No Yes

10. Auditors are often concerned with three aspects of internal controls related
easy to the sales and collection cycle. Which of the following is not one of those
controls?
c a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.

11. Cutoff misstatements occur when:

easy
c The auditor fails to obtain
the end-of-year bank Subsequent Current period
statement directly from the period transactions
bank, obtaining instead the transactions are recorded in
statement which includes the are recorded the subsequent
two succeeding weeks in the current period
period
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No Yes No
12. Cutoff misstatements occur:
easy a. either by error or fraud.
a b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.

13. Generally accepted accounting principles require that material sales

returns and allowances be:
easy a. recorded in the period when the merchandise is returned.
c b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.

14. Communication addressed to the debtor requesting him or her to confirm

easy whether the balance as stated on the communication is correct or incorrect
is a:
d a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.

15. A type of positive confirmation known as a blank confirmation:

easy a. requests the recipient to fill in the amount of the balance.
a 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.

16. For sales, the occurrence transaction-related audit objective affects the
medium ______ balance-related audit objective.
a a. existence
b. completeness
c. rights
d. detail tie-in

17. For cash receipts, the occurrence transaction-related audit objective affects
medium the ______ balance-related audit objective.
b a. existence
b. completeness
c. rights
d. detail tie-in

18. Which of the following is likely to be determined first when performing

medium tests of details for accounts receivable?
b 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.

19. Analytical procedures are substantive tests and, if the results of the
medium analytical procedures are favorable, the auditor will:
a 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.

20. The most effective test of details of accounts receivable is the:

medium a. detail tie-in of the records.
c b. analysis of the allowance for doubtful accounts.
c. confirmation of accounts receivable.
d. examination of sales invoices.

21. Tests of details of balances are directed to:

medium a. balance sheet accounts for all cycles.
a b. income statement accounts for all cycles.
c. balance sheet accounts for some cycles and income statement
accounts for other cycles.
d. all general ledger accounts for all cycles.

22. The most important test of details of balances for accounts receivable is:
medium a. confirmations.
a b. recalculation of the aged receivables and uncollectible accounts.
c. tracing credit memos for returned merchandise to receiving room
reports.
d. tracing from shipping documents to journals to the accounts
receivable ledger.
23. The most important test of details of balances to determine the existence of
medium recorded accounts receivable is:
d a. tracing details of sales invoices to shipping documents.
b. tracing the credits in accounts receivable to bank deposits.
c. tracing sales returns entries to credit memos issued and receiving
room reports.
d. the confirmation of customers’ balances.

24. When should auditors not perform alternative procedures in testing the
medium accounts receivable balance?
b a. When customers do not return positive confirmation requests.
b. When customers do not return negative confirmation requests.
c. When confirmations are deemed to be ineffective as an audit
procedure.
 d. When confirmations are too costly to use.
25. Because of its central role in auditing of accounts receivable, the
medium ______________ is one of the first items tested.
c a. accounts receivable master file
b. customer file
c. aged trial balance
d. sales register

26. If accounts receivable accounts with credit balances are significant, they
should be:
medium a. written off.
c b. moved to the debit side.
c. reclassified as accounts payable.
d. corrected by making adjusting entries.

27. Most tests of accounts receivable are based on what schedule, file, or
listing?
medium a. Sales master file.
b b. Aged accounts receivable trial balance.
c. Accounts receivable master file.
d. Accounts receivable general ledger account.

28. If the client’s internal control for recording sales returns and allowances is
medium evaluated as ineffective:
a a. a larger sample is 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 customer.

29. A customer mails and records a check to a client for payment of an unpaid
medium account on December 30. The client receives and records the amount on
d January 2. The records of the two organizations will be different on
December 31. This represents

A cutoff misstatement A timing difference

a. Yes Yes
b. No No
c. Yes No
d. No Yes

30. Which of the following audit procedures would not likely detect a client’s
medium decision to pledge or factor accounts receivable?
c 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.
31. When do most companies record sales returns and allowances?
medium a. During the month in which the sale occurs.
b 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.

32. Cutoff misstatements can occur for:

Medium
a Sales Sales returns and allowances
a. Yes Yes
b. No No
c. Yes No
d. No Yes

33. The most important aspect of evaluating the client’s method of obtaining a
reliable cutoff is to:
medium a. perform extensive detailed testing of cutoff.
b 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.

34. A positive confirmation is more reliable evidence than a negative

confirmation because:
medium a. fewer confirmations can be sent out.
d b. the auditor has a document which can be used in court.
c. the debtor’s lack of response indicates agreement with the stated
balance.
d. follow-up procedures are performed if a response is not received
from the debtor.

35. The advantage of using the negative form of confirmations is that:

medium a. larger sample sizes can be used without increasing the costs above
a what would have been required for positive confirmations.
b. a non-response from the customer proves that the balance is
correct.
c. follow-up procedures are scheduled automatically.
d. they provide greater reliance.

36. Which of the following procedures do most auditors perform when

medium auditing the allowance for doubtful accounts?
b a. Send positive confirmations.
b. Inquire of the client’s credit manager.
c. Send negative confirmations.
d. Examine sales invoices.
37. When positive confirmations are used, auditing standards require follow-
medium up procedures for confirmations not returned by the customer. In such a
a situation, which of the following would not be classified as an alternative
procedure?
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.

38. Generally accepted accounting principles require that sales returns and
medium allowances be matched with related sales:
c a. if practical.
b. if required by industry practice.
c. if the amounts are material.
d. any of the above.

39. For which of the following accounts is cutoff least important?

medium a. Sales
c b. Sales returns and allowances
c. Cash collections
d. Inventory

40. What are the possible disadvantages of evaluating the allowance for
medium doubtful accounts by reviewing individual non-current balances only?
a
Current accounts It is difficult to compare results of the
receivable may be current and prior years
ignored
a. Yes Yes
b. No No
c. Yes No
d. No Yes

41. Which of the following most likely would be detected by a review of a

client’s sales cutoff?
medium a. Excessive sales discounts.
b b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end accounts receivable.

42. The positive (as opposed to the negative) form of receivables confirmation
is preferred when:
medium a. internal control surrounding accounts receivable is considered to be
effective.
b b. there is reason to believe that a substantial number of accounts may
be in dispute.
c. a large number of small balances are involved.
d. there is reason to believe a significant portion of the requests will be
made.

43. An auditor should perform alternative procedures to substantiate the

medium existence of accounts receivable when:
a 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.

44. How might the auditor determine whether a client has limited rights to
accounts receivable?
Medium
a Review minutes from board of Inquiries of the client
directors meetings
a. Yes Yes
b. No No
c. Yes No
d. No Yes

45. Confirmation of accounts receivable balances normally provides evidence

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

46. If the auditor decides not to confirm accounts receivable, the auditor
should:
medium a. always use alternative procedures to audit the accounts receivable.
c 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.

47. The understatement of sales and accounts receivable is best uncovered by:
challenging a. confirming receivables.
c b. reviewing the aged trial balance.
c. test of transactions for shipments made but not recorded.
d. reconciling the accounts receivable general ledger account with the
schedule of accounts receivable.

48. You are reviewing sales to discover cutoff problems. If the client’s policy is
challenging to record sales when title to the merchandise passes to the buyer, then the
a books and records would contain errors if the December 31 entries were
for sales recorded:
a. before the merchandise was shipped.
b. at the time the merchandise was shipped.
c. several days subsequent to shipment.
d. at a time after the point at which title passed.

49. A procedure to test for a cash receipts cutoff error is:

challenging a. reconciling the bank statement.
d b. performing a four-column proof-of-cash.
c. observing the counting of cash at the balance sheet date.
d. tracing recorded cash receipts to bank deposits on the bank
statement of a different period.

50. The most reliable evidence from confirmations is obtained when they are
sent:
challenging a. as close to the balance sheet date as possible.
a 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.

51. Which of the following is the least important consideration in determining

challenging the sample size of confirmations?
a a. The types of confirmations being sent; that is, positive or negative.
b. The results of related analytical procedures.
c. Total annual credit sales.
d. The auditor’s assessment of detection risk.

52. An auditor learns that collections of accounts receivable during the first
challenging ten days of January were debited to cash and credited to accounts
d receivable as of December 31. The effect generally will be to:
a. overstate the current ratio with no effect on working capital 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. leave both working capital and the current ratio unchanged at
December 31.

53. For effective internal control, employees maintaining the accounts

challenging receivable subsidiary ledger should not also approve:
c a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.

54. For most audits, a proper cash receipts cutoff is less important than the
challenging sales cutoff because the improper cutoff of cash:
c a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the balance sheet or the
income statement.
c. affects on the cash and accounts receivable balances on the balance
sheet and does not affect net income.
d. rarely occurs given the control consciousness of most entities.

55. Negative confirmations of receivables are less effective than positive

medium confirmations of receivables because:
b a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their
account information.
c. some recipients may report incorrect balances that require
extensive follow-up.
d. a majority of recipients usually lack the willingness to respond
objectively.

56. An auditor would be least likely to use confirmations in connection with

the examination of:
medium a. inventories.
c b. long-term debt.
c. property, plant, and equipment.
d. stockholders’ equity.

57. An auditor selects a sample from the file of shipping documents to

medium determine whether invoices were prepared. This test is performed to satisfy
the audit objective of:
d a. accuracy.
b. existence.
c. control.
d. completeness.

58. When performing tests of controls and tests of transactions for sales, the
challenging auditor generally defines the population as:
b a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.
Essay Questions

59. Auditing standards require the confirmation of accounts receivable in

easy normal circumstances. What are the three exceptions to this requirement?

Answer:
The three exceptions are:
1.  Accounts receivable are immaterial.
2.  The auditor considers confirmations ineffective evidence because
response rates will likely be inadequate or unreliable.
3.  The combined level of inherent risk and control risk is low and other
substantive evidence can be accumulated to provide sufficient evidence.

60. Describe the differences between positive and negative confirmations.

easy Which type is generally viewed as more reliable?

Answer:
A positive confirmation requests the recipient to respond regardless
of whether the balance as stated on the confirmation is correct or incorrect.
In contrast, a negative confirmation requests the recipient to respond only
if the balance as stated on the confirmation is incorrect. Positive
confirmations are more reliable because the auditor can perform follow-up
procedures if a response is not received from the customer.

61. A threefold approach is typically followed when determining the

medium reasonableness of cutoff. Briefly describe the threefold approach.

Answer:
First, auditors should decide on the appropriate cutoff criteria. Second,
they must evaluate whether the client has established adequate procedures
to ensure a reasonable cutoff. Finally, auditors must test whether a
reasonable cutoff was obtained.

62. Discuss the alternative procedures an auditor can perform to test the
medium existence objective for accounts receivable when customers do not respond
to confirmation requests.

Answer:
For any positive confirmation not returned, the auditor can examine
the following to verify the existence of individual sales transactions making
up the ending balance in accounts receivable:
 Subsequent cash receipts—evidence of the receipt of cash after the
confirmation date includes examining remittance advices and entries in the
cash receipts records.
Duplicate sales invoices.
Shipping documents.
Correspondence between the customer and the client.

63. Describe how the auditor tests the accuracy objective for accounts
medium receivable.
Answer:
Confirmation of accounts selected from the trial balance is the most
common test of details of balances for the accuracy of accounts receivable.
When customers do not respond to confirmation requests, auditors
examine supporting documents in the same way as described for the
existence objective. Auditors perform tests of the debits and credits to
individual customers’ balances by examining supporting documentation
for shipments and cash receipts.

64. Describe how the auditor tests the classification objective for accounts
medium receivable.

Answer:
Normally, auditors can evaluate the classification of accounts
receivable relatively easily, by reviewing the aged trial balance for material
receivables from affiliates, officers, directors, or other related parties.
Auditors should verify that notes receivable or accounts that should be
classified as noncurrent assets are separated from regular accounts, and
significant credit balances in accounts receivable are reclassified as
accounts payable.

65. Discuss the audit procedures performed when testing the detail tie-in
medium objective for accounts receivable, and explain why this objective is
ordinarily tested before any other objectives for accounts receivable.

Answer:
When testing the detail tie-in objective for accounts receivable, the
total column and the columns depicting the aging on the aged trial balance
are footed, and the total is compared to the general ledger. In addition, a
sample of individual balances on the aged trial balance should be traced to
supporting documents to verify the customer’s name, balance, and proper
aging. These tests are ordinarily done before any other tests to assure the
auditor that the population being tested agrees with the general ledger and
 accounts receivable master file.

66. Assuming the client’s internal controls are adequate, describe how the
medium auditor can verify proper cutoff of sales transactions.

Answer:
Assuming the client’s internal controls are adequate, the auditor
can verify proper cutoff of sales transactions by obtaining the shipping
document number for the last shipment made at the end of the period and
comparing this number with current and subsequent period recorded sales.

67. Describe how the auditor tests the rights objective for accounts receivable.
medium
Answer:
The auditor can test the rights objective for accounts receivable
through reviewing the client’s minutes, discussions with the client,
confirmation with banks, and the examination of correspondence files to
determine whether receivables may have been pledged as collateral,
assigned to someone else, factored, or sold.

68. Discuss the advantages and disadvantages of using negative accounts

medium receivable confirmations rather than positive confirmations.

Answer:
The primary advantage of negative confirmations is that they are
less expensive than positive confirmations because there are no second
requests and no follow-up of nonresponses. The primary disadvantage of
negative confirmations is that they are less reliable than positive
confirmations because a nonresponse must be regarded as a correct
response, even though the debtor may have ignored the confirmation
request.

69. Briefly describe the circumstances in which it is acceptable to use negative

medium confirmation requests.

Answer:
It is acceptable to use negative confirmation requests only when all
of the following circumstances are present:
Accounts receivable is made up of a large number of small accounts.
Combined assessed control risk and inherent risk is low.
There is no reason to believe that the recipients of the confirmations are
unlikely to give them consideration.
70. Describe each of the following types of confirmations:
medium Positive confirmation
Blank confirmation form
Invoice confirmation
Negative confirmation

Answer:
Positive confirmations are communications addressed to a debtor
requesting the recipient to confirm whether the balance as stated on the
confirmation is correct or incorrect.
Blank confirmation forms do not state the amount, but requests the
recipient to fill in the balance or furnish other information.
Invoice confirmations request a recipient to confirm an individual invoice
rather than an entire balance.
Negative confirmations are addressed to debtor, but request responses only
if the information is incorrect.

71. What are the major factors affecting sample size for confirming accounts
challenging receivable?
Answer:
The factors include:
tolerable misstatement,
inherent risk (e.g., relative size of accounts receivable and number of
accounts),
control risk,
achieved detection risk form other substantive tests, and
the type of confirmation (e.g., negative normally requires a larger sample
size).

72. When an auditor uses negative confirmations several factors must be

challenging considered. What are those factors?
Answer:
The auditor must carefully consider the following:
The effectiveness of the client’s internal controls
Results of substantive tests of transactions
The appropriateness of analytical procedures as evidence on the fairness of
accounts receivable.
Whether a large majority of recipients will give careful consideration to the
confirmation.
Other Objective Answer Format Questions

73. Match seven of the terms (a-k) with the definitions provided below (1-7):
medium
a. Accounts receivable balance-related audit objectives
b. Aged trial balance
c. Alternative procedures
d. Blank confirmation form
e. Cutoff misstatements
f. Evidence planning worksheet
g. Negative confirmation
h. Positive confirmation
i. Realizable value of accounts receivable
j. Timing difference in an account receivable confirmation
k. Invoice confirmation

c 1. The follow-up of a positive confirmation not returned by the

debtor with the use of documentation evidence to determine whether the
recorded receivable exists and is collectible.

h 2. A letter, addressed to the debtor, requesting that the

recipient indicate directly on the letter whether the stated account balance
is correct or incorrect and, if incorrect, by what amount.

e 3. Misstatements that take place as a result of current period

transactions being recorded in a subsequent period, or subsequent period
transactions being recorded in the current period.

f 4. A form used to help the auditor decide whether planned

detection risk for tests of details of balances should be low, medium, or
high for each balance-related audit objective.

g 5. A letter, addressed to the debtor, requesting a response only

if the recipient disagrees with the amount of the stated account balance.

j 6. A reported difference in a confirmation from a debtor that is

determined to be a timing difference between the client’s and debtor’s
records and therefore not a misstatement.

b 7. A listing of the balances in the accounts receivable master

file at the balance sheet date broken down according to the amount of time
that has passed between the date of sale and the balance sheet date.

74. Tests of details of balances must be designed for each balance-related audit
easy objective.
a a. True
b. False

75. Favorable results from analytical procedures reduce the extent to which
easy the auditor needs to test details of balances.
a a. True
b. False

76. Tests of detail tie-in are normally conducted last in the audit of the sales
easy and collections cycle.
b a. True
b. False

77. The criterion used by most merchandising and manufacturing clients for
easy determining when a sale takes place is whether title to the goods has
a passed.
a. True
b. False

78. For sales, the completeness transaction-related audit objective affects the
medium existence balance-related audit objective.
b a. True
b. False

79. For cash receipts, the occurrence transaction-related audit objective affects
medium the completeness balance-related audit objective.
a a. True
b. False

80. The balance-related audit objectives of realizable value and rights are
medium affected by assessed control risk.
b a. True
b. False

81. Tests of the presentation and disclosure-related objectives are generally

medium done as part of the completion phase of the audit.
a a. True
b. False

82. Tests of details of balances focus on testing the year-end balances of

medium balance sheet accounts.
a a. True
b. False

83. Confirmation of accounts receivable provide evidence related to the

medium existence, accuracy and cutoff objectives.
a a. True
b. False

84. Confirmation is the most common test of details of balances for the
medium accuracy of accounts receivable.
a a. True
b. False

85. Accounts receivable need not be confirmed if they are immaterial to the
medium financial statements.
a a. True
b. False

86. Blank confirmations are considered less reliable than standard positive
medium confirmations.
b a. True
b. False

87. Negative confirmations are less expensive, and less reliable, than positive
medium confirmations.
a a. True
b. False
88. It is common to use a combination of positive and negative confirmations
medium by sending the latter to accounts with large balances and the former to
b those with small balances.
a. True
b. False

89. Tests of the realizable value balance-related audit objective are for the
medium purpose of evaluating the allowance for doubtful accounts.
a a. True
b. False

90. If auditors consider confirmations of accounts receivable to be ineffective

medium evidence because response rates will be very low, they need not confirm
a accounts receivable.
a. True
b. False

91. The type of receivables confirmation is a major factor affecting sample

medium size, with negative confirmations normally requiring a larger sample than
a positive confirmations.
a. True
b. False

92. When sending confirmations during most audits of accounts receivable, the
medium emphasis is often on confirming larger and older accounts.
a a. True
b. False

93. When a customer disagrees with the amount shown on an account

medium receivable confirmation, the auditor should not ask the client to reconcile
b the difference.
a. True
b. False

94. The accounts receivable balance-related audit objective net realizable

medium value is not affected by assessed control risk for sales or cash receipts.
a a. True
b. False

95. For most audits, a proper cash receipts cutoff is less important than either
medium the sales or the sales returns and allowances cutoff.
a a. True
b. False

96. Auditors must maintain control of confirmations until they are returned
medium from the customer.
a a. True
b. False
97. When a customer does not return an accounts receivable confirmation, it is
medium acceptable, without performing alternative procedures, to assume the
a amount is 100% overstated when generalizing from the sample to the
population.
a. True
b. False