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EMGP Chapter 10

According to international accounting standard, which of the following is not a criterion for revenue recognition?
goods.

A)

The entity has transferred to the buyer the significant risks and rewards of ownership of the

B)

Cash is received.

C)

The amount of revenue can be measured reliably.

D)

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

Which of the following actions would best conceal the theft of cash collections from sales on account?
A)

Understating the cash receipts journal amounts.

B)

Understating the sales journal amounts.

C)

Overstating the accounts receivable control account.

D)

Overstating the accounts receivable subsidiary ledger.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger
should not also approve
A)

Employee overtime wages.

B)

Credit granted to customers.

C)

Write-offs of customer accounts.

D)

Cash disbursements.

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are
recorded?
A)

The billing department supervisor sends a copy of each approved sales order to the credit department
for comparison to the customers authorized credit limit and current account balance.

B)

The accounting department supervisor independently reconciles the accounts receivable subsidiary
ledger to the accounts receivable control account each month.

C)

The accounting department supervisor controls the mailing of monthly statements to customers and
investigates any differences reported by customers.

D)
The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal.

Which of the following internal controls would be most likely to deter the lapping of collections from customers?
A)
Independent internal verification of dates of entry in the cash receipts journal with dates of daily
cash summaries.
B)
Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit
approval function.

entries.

C)

Segregation of duties between receiving cash and posting the accounts receivable ledger.

D)

Supervisory comparison of the daily cash summary with the sum of the cash receipts journal

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with
a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine
whether credit limits are being exceeded. The best procedure for the auditor to follow would be to
A)

Develop test data that would cause some account balances to exceed the credit limit and determine if
the system properly detects such situations.

B)

Develop a program to compare credit limits with account balances and print out the details of any
account with a balance exceeding its credit limit.

C)
Request a printout of all account balances so that they can be manually checked against the credit
limits.
D)
Request a printout of a sample of account balances so that they can be individually checked against the
respective credit limits.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this
defalcation and be least likely to be detected by an auditor?
A)

Understating the sales journal.

B)

Overstating the accounts receivable control account.

C)

Overstating the accounts receivable subsidiary ledger.

D)

Understating the cash receipts journal.

To determine whether the entitys internal control operated effectively to minimize the likelihood of failing to bill
a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the
population represented by the
A)

Accounts receivable subsidiary ledger.

B)

Customer order file.

C)

Shipping document (bill of lading) file.

D)

Sales invoice file.

Which of the following is not a key segregation of duties in the revenue process?
A)

The credit function should be segregated from the billing function.

B)

The shipping function should be segregated from the billing function.

C)

The accounts receivable function should be segregated from the invoice preparation function.

D)

The cash receipts function should be segregated from the accounts receivable function.

Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated
with sales transactions?
A)

The nature of the credit authorization process.

B)

Billings are made using the percentage-of-completion method of revenue recognition.

C)

Each sales transaction is individually negotiated with the customer.

D)
agreement.

The conditions of the sale allow for a right of return or the right to modify the purchase

Which of the following is the population the auditor is most likely to draw from in order to test the cut-off
assertion for revenue?
A)

Shipping documents.

B)

Customer sales orders.

C)

Customer account receivable balances.

D)

The record of sales returns.

Tracing shipping documents (bills of lading) to sales invoices as a test of controls related to the sales and
collection process provides evidence that
A)

Shipments to customers were recorded in the sales journal.

B)

Recorded sales were actually shipped.

C)

Customers were billed for goods shipped to them.

D)

Customers were billed for the correct amounts.

Customers are more likely to complain to the entity if which of the following assertions for cash receipts is
violated?
A)

Existence.

B)

Completeness.

C)

Authorization.

D)

Rights and obligations.

Which of the following would not be considered a test in the area of accounts receivable that relates to the
existence assertion?
A)

Evaluate proper segregation of duties.

B)

Confirm accounts receivable directly with customers.

C)

Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger.

D)

Review receipt of cash from customers in the period subsequent to the balance sheet date.

If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2013 compared to only 5.6 times in
2014, it is possible that there were
A)

Unrecorded credit sales in 2014.

B)

Unrecorded cash receipts in 2013.

C)

More thorough credit investigations made by the company late in 2013.

D)

Fictitious sales in 2014.

If the number of days sales in accounts receivable (365 days/receivables turnover) decreases significantly,
which of the following assertions for accounts receivable most likely is violated?
A)

Existence or occurrence.

B)

Completeness.

C)

Rights and obligations.

D)

Classification.

Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an
entitys sales efforts?
A)

Current year sales to current year budgeted sales.

B)

Current year ending accounts receivable to prior year ending accounts receivable.

C)
Current year bad debts expense as a percentage of accounts receivable to the same value for
the prior year.
D)

Current year gross profit to prior year gross profit.

Which of the following is most likely to be detected by an auditors review of an entitys sales cutoff?
A)

Unrecorded sales for the year.

B)

Lapping of year-end accounts receivable.

C)

Excessive sales discounts.

D)

Unauthorized goods returned for credit.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entitys
aging of receivables to support managements financial statement assertion of
A)

Existence.

B)

Valuation and allocation.

C)

Completeness.

D)

Rights and obligations.

An auditors purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely
to obtain evidence concerning managements assertions relating to
A)

Valuation or allocation.

B)

Presentation and disclosure.

C)

Existence or occurrence.

D)

Rights and obligations.

The negative request form of an accounts receivable confirmation is particularly useful when

A)

Few

Low

Unlikely

B)

Few

High

Likely

C)

Many

High

Likely

D)

Many

Low

Likely

Which of the following procedures would an auditor most likely perform related to year-end accounts receivable
confirmations when the auditor does not receive replies even after second requests?
A)

Review the cash receipts journal for the month prior to year-end.

B)
customers.

Inspect related shipping records and sales invoices documenting the merchandise sold to

C)

Intensify the study of internal control concerning the revenue and collection cycle.

D)

Increase assessed detection risk related to existence assertion in this area.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable
because
A)

A majority of recipients usually lack the willingness to respond objectively.

B)

Some recipients may report incorrect balances that require extensive follow-up.

C)

The auditor cannot infer that all non-respondents have verified their account information.

D)

Negative confirmations do not produce evidence that is statistically quantifiable.

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)

The collectability of the receivables is in doubt.

D)

Pledging of the receivables is probable.

Which of the following is not a typical procedure performed related to other non-trade receivables?
A)

Confirmation of the amount with the other party.

B)

Evaluation of the collectability of other receivables.

C)

Examination of the note for repayment terms and interest arrangements.

D)
Write-off of receivables from officers against their bonus pay as those arrangements are
inappropriate.

If performance materiality for the accounts receivable balance is 75,000 and the aggregate factual
misstatement found by the auditor is 82,000, the auditor is most likely to
A)

Resign from the engagement.

B)

Issue a qualified opinion.

C)

Require that the entity adjust its accounts receivable balance by at least 7,000.

D)

Require no adjustment to account receivable.