Audit of the Sales and Collection Cycle
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Questions and Answers

What is the primary purpose of issuing a credit memo?

  • To document an increase in inventory
  • To record a reduction in the amount owed due to returned goods (correct)
  • To indicate a payment received from the customer
  • To summarize end-of-period sales data

    • Which accounts are impacted when charging off uncollectible accounts receivable?

  • Sales revenue and Bad debt expense
  • Accounts receivable and Allowance for uncollectible accounts (correct)
  • Accounts receivable and Cash
  • Accounts payable and Sales revenue

    • What document is necessary to record sales returns and allowances promptly?

  • Credit application
  • Receiving report (correct)
  • Purchase order
  • Sales order form

    • Which journal is specifically used to record sales returns and allowances transactions?

    <p>Sales returns and allowances journal</p> Signup and view all the answers

    What method is used to provide for bad debts in accounting?

    <p>Allowance method</p> Signup and view all the answers

    What is the purpose of the uncollectible account authorization form?

    <p>To authorize writing off accounts receivable as uncollectible</p> Signup and view all the answers

    What is typically included in assessing planned control risk for sales?

    <p>Internal control questionnaire and walk-through tests</p> Signup and view all the answers

    Which of the following is NOT a function of the cash receipts journal?

    <p>Issuing credit memos for returns</p> Signup and view all the answers

    What is a key prevention method to avoid cash handling discrepancies?

    <p>Segregation of duties for cash handling and receipts entry</p> Signup and view all the answers

    Which of the following is NOT one of the nine balance-related audit objectives for accounts receivable?

    <p>Transparency</p> Signup and view all the answers

    Which step is NOT part of the auditor's methodology for designing tests of details of balances?

    <p>Create a comprehensive risk report</p> Signup and view all the answers

    What should auditors assess for accounts receivable before designing tests of details?

    <p>Materiality and risk considerations</p> Signup and view all the answers

    What is the significance of comparing remittance advices with cash receipts journal entries?

    <p>To detect cash handling errors or fraud</p> Signup and view all the answers

    What is inherent risk in the context of designing tests for accounts receivable?

    <p>The risk that a certain balance may exist without proper controls in place</p> Signup and view all the answers

    Which of the following is an example of a substantive test of transactions?

    <p>Reviewing the accuracy of recorded sales transactions</p> Signup and view all the answers

    Why is timing important in tests of details of balances for accounts receivable?

    <p>To match with customer billing cycles</p> Signup and view all the answers

    What should an auditor do to ensure completeness of recorded sales transactions?

    <p>Review shipping documents and trace them to sales invoices and the sales journal.</p> Signup and view all the answers

    What can indicate a potential duplicate sale?

    <p>A numerically sorted list of recorded sales transactions shows identical invoice numbers.</p> Signup and view all the answers

    What is one risk associated with shipping to nonexistent customers?

    <p>Weak controls can make detection of this issue difficult.</p> Signup and view all the answers

    When performing substantive tests for sales accuracy, which of the following is NOT a typical procedure?

    <p>Verifying customer satisfaction with the goods.</p> Signup and view all the answers

    Which direction of testing is aimed at verifying the existence of transactions?

    <p>Tracing from the journals back to the source documents.</p> Signup and view all the answers

    What may an auditor do to address potential inaccuracies in automated sales invoice calculations?

    <p>Use computer audits to check invoice calculations periodically.</p> Signup and view all the answers

    What is a common substantive test to identify unbilled shipments?

    <p>Tracing selected shipping documents to related duplicate sales invoices.</p> Signup and view all the answers

    What error is most likely if the controls are inadequate for tracking shipments?

    <p>No follow-up on unpaid accounts.</p> Signup and view all the answers

    What should customers do if they find an improperly stated balance in their account?

    <p>Contact the independent designated official.</p> Signup and view all the answers

    Which of the following is not a typical procedure used in substantive tests of transactions?

    <p>Conducting interviews with sales staff.</p> Signup and view all the answers

    What influences the procedures used in designing substantive tests of transactions?

    <p>Materiality and results of the prior year.</p> Signup and view all the answers

    What type of misstatement concerns auditors regarding recorded sales?

    <p>Sales entries made in the absence of shipments.</p> Signup and view all the answers

    What can be done to ensure that recorded sales have legitimate support?

    <p>Trace selected entries to related shipping and supporting documents.</p> Signup and view all the answers

    When should substantive tests of transactions be performed?

    <p>When there is a belief that control weaknesses exist.</p> Signup and view all the answers

    Why is it important to check the accuracy of document preparation in sales processing?

    <p>To validate that proper processes are followed for consistency.</p> Signup and view all the answers

    Which procedure is essential for confirming recorded sales exist as intended?

    <p>Tracing amounts to perpetual inventory records.</p> Signup and view all the answers

    What is the primary framework for developing tests of cash receipts?

    <p>The same methodology used for tests of sales</p> Signup and view all the answers

    Which procedure is essential for detecting cash fraud before it is recorded?

    <p>Trace from prenumbered remittance advices to the cash receipt journal</p> Signup and view all the answers

    What is the purpose of preparing a proof of cash?

    <p>To compare total cash receipts with actual bank deposits</p> Signup and view all the answers

    What internal control issue increases the risk of fraud in cash receipts?

    <p>Weaknesses in internal controls</p> Signup and view all the answers

    What can a proof of cash not detect?

    <p>Unrecorded cash receipts</p> Signup and view all the answers

    What does lapping of accounts receivable typically involve?

    <p>Postponing entry of cash received to conceal shortages</p> Signup and view all the answers

    Which control is essential for satisfying the completeness objective in cash receipts?

    <p>Trace from prelists to cash receipt journals</p> Signup and view all the answers

    What is a key factor in developing tests of controls for cash receipts?

    <p>The extent of reliance on identified controls</p> Signup and view all the answers

    What does IFRS require for the statement of accounts receivable?

    <p>Accounts receivable must be stated at realizable value.</p> Signup and view all the answers

    Which factors should an auditor consider when evaluating the allowance for uncollectible accounts?

    <p>Consistent credit policy test results with previous years.</p> Signup and view all the answers

    Which of the following is NOT a method to uncover limited rights to accounts receivable?

    <p>Reviewing employee performance evaluations.</p> Signup and view all the answers

    What should auditors do to evaluate the adequacy of presentation and disclosures regarding accounts receivable?

    <p>Understand IFRS thoroughly.</p> Signup and view all the answers

    Which audit objective does confirming accounts receivable primarily address?

    <p>Existence, accuracy, and cutoff.</p> Signup and view all the answers

    How should auditors assess aging of noncurrent receivables?

    <p>Compare with historical data from prior years.</p> Signup and view all the answers

    Which of the following is a factor that does NOT affect the realizable value of accounts receivable?

    <p>Payment terms offered to customers.</p> Signup and view all the answers

    What would indicate that a client has rights to accounts receivable?

    <p>Bank confirmations showing no collateral on receivables.</p> Signup and view all the answers

    Study Notes

    Audit of the Sales and Collection Cycle

    • Auditors perform tests of controls and tests of transactions and balances to assess the client's internal control system.
    • Understanding when to rely extensively on internal controls and when not is crucial.
    • This chapter focuses on assessing control risk and designing tests of controls and substantive tests of transactions for each class of transactions in the sales and collection cycle.
    • The objective in the sales and collection cycle audit is to determine if accounts balances are fairly presented according to IFRS.
    • Accounts in the cycle include Sales, Accounts Receivable, Cash in Bank, Cash Discounts Taken, Allowance for Uncollectible Accounts, and Bad Debt Expense.
    • Transactions in the sales and collection cycle include Sales (cash and on account), Cash receipts, Sales returns and allowances, Charge-offs of uncollectible accounts, and Estimate of bad debt expense.
    • The sales and collection cycle involves transferring ownership of goods/services to customers.
    • Key Business Functions: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.
    • Related Documents/Records: Customer Order, Sales Order, Shipping Document (bill of lading), Shipping Document (multicopy), Sales Invoice, Sales Transaction File, Sales Journal, Accounts Receivable Master File, Cash Receipts Transaction File, and Cash Receipts Journal.

    Sales Transaction

    • Accounts: Sales, Accounts Receivable
    • Business Functions: processing customer orders (using Customer Order document), granting credit (authorized person approves credit to customer), shipping goods (shipping document prepared), billing customers (customer informed of amount due).
    • Documents/Records: Customer Order, Sales Order, Shipping Documents, Sales Invoice, Sales Transaction File,

    Cash Receipts Transaction

    • Accounts: Cash in Bank, Accounts Receivable
    • Business Functions: processing and recording cash receipts (receiving, depositing, recording cash),
    • Documents/Records: Remittance Advice, Cash Receipts Transaction File, Cash Receipts Journal.

    Sales Returns and Allowances Transaction

    • Accounts: Sales returns and allowances, Accounts Receivable
    • Business Functions: processing and recording sales returns and allowances (customer dissatisfied with goods).
    • Documents/Records: Credit memo, Sales returns and allowances journal.

    Charge-off of Uncollectible Accounts Transaction

    • Accounts: Accounts Receivable, Allowance for uncollectible accounts
    • Business Functions: charging off uncollectible accounts receivable (when company concludes an amount is no longer collectible).
    • Documents/Records: Uncollectible account authorization form, General Journal.

    Bad Debt Expense Transaction

    • Accounts: Bad debt expense, Allowance for uncollectible accounts
    • Business Functions: providing for bad debts.
    • Documents/Records: General Journal

    Methodology for Designing Tests of Controls and Substantive Tests

    • Understanding internal controls, planning control risk (four essential steps).
    • Design tests of controls for sales and cash receipts
    • Design substantive tests of transactions,
    • Audit procedures are affected by internal controls and tests of controls.
    • Materiality and results of prior year affect procedures used.

    Recorded Sales Exist

    • Auditor concerned about misstatements: sales recorded but not shipped, duplicated sales, incorrect customers.
    • Trace selected entries, trace amounts to perpetual inventory records, trace credit to the A/R master file.
    • Follow up by examining documents.

    Existing Sales Transactions are Recorded

    • Substantive test focusing on the completeness or existence of existing sales transactions.
    • Trace related shipping documents/sales invoices and the sales journal to ensure all transactions are correctly recorded.

    Design and Perform Analytical Procedures

    • Use analytical procedures to assess the plausibility of balances.
    • Compare current period balances to prior periods.
    • Identify unusual fluctuations in amounts.
    • Accounts Receivable tests of details of balances are used to verify the balance sheet account.

    Confirmation of Accounts Receivable

    • Confirmation of Accounts Receivable is a primary procedure to test existence, accuracy, and cutoff.
    • Positive or negative confirmation requests are sent to customers.
    • Blank or invoice confirmations are used.
    • The confirmations are sent close to the balance sheet date.

    Correspondence with the Client

    • Auditor may review correspondence to uncover disputed receivables not otherwise identified.
    • Evaluate internal controls, misstatements, and evidence obtained.

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    Related Documents

    Audit II Chapter 3 - Audit of Sales and Collection Cycle PDF

    Description

    This quiz delves into the auditing process concerning the Sales and Collection Cycle. It covers topics such as the assessment of control risk, the design of tests of controls, and substantive tests for transactions. Participants will explore the importance of internal controls and the presentation of accounts balances per IFRS standards.

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