Substantive Tests and Internal Control for Sales and Receivables

1. An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support
of management’s financial statement assertion of
a. Valuation and allocation c. Completeness
b. Existence d. Rights and obligations

2. One of the two clerks in a small company prepares a sales invoice for P43,000; however, the invoice is
incorrectly entered by the bookkeeper in the general ledger and the accounts receivable subsidiary ledger
as P34,000. The customer subsequently remits P34,000, the amount on the monthly statement. Assuming
there are only three employees in the department, the most effective control to prevent this type of error is
a. Assigning the second office clerk to independently check the sales invoice prices, discounts,
extensions, and footings, and to account for the invoice serial number.
b. Requiring that monthly statements be prepared by the bookkeeper and verified by one of the
office clerks prior to mailing.
c. Using predetermined totals to control posting routines.
d. Requiring the bookkeeper to perform periodic reconciliations of the accounts receivable
subsidiary ledger and the general ledger.

3. A sales cutoff test of billings complements test of

4. 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.

5. In the confirmation of accounts receivable, the auditor would most likely

6. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An
auditor most likely will use
a. The positive form to confirm all balances, regardless of size.
b. A combination of the two forms, with the positive form used for trade receivables and the form for small
balances.
c. A combination of the two forms, with the positive form used for trade receivables and the negative form
for other receivables.
d. The positive form when the control structures related to receivables are satisfactory and the negative
form when controls are unsatisfactory.

7. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control
accounts as of December 31, 2002. By this procedure the auditor would most likely learn which of the
following?
a. An October invoice was improperly computed.
b. An October check form a customer was posted in error to the account of another customer with similar
name.
c. An opening balance in a subsidiary ledger account will improperly carried forward from previous
accounting period.
d. An account balance is past due and should be written off.

8. Which of the following is the best argument against the use of the 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 subtitle request for payment.
d. The inference drawn from receiving no reply may not be correct.

9. If accounts receivable turned over 7.1 times in 2002, as compared to only 5.6 times in 2001, it is possible
that there were
a. Unrecorded credit sales in 2002.
b. Unrecorded cash receipts in 2002.
c. More thorough credit investigations made by the company in late 2002.
d. Fictitious sales in 2002.

10. Which of the following would most likely be deleted by an auditor’s review of a client’s sales cutoff?
a. Unrecorded sales for the year. c. Excessive sales discounts.
b. Lapping of year-end accounts receivable. d. Unauthorized goods returned for credit.

11. The auditor should ordinarily mail confirmation requests to all the banks with which client has conducted any
business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. The procedure will detect kiting netivities, which would otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by generally accepted auditing
standards.
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 d. The procedure relieves the auditor of any responsibility with respect to nondetection of forged checks.

12. Once an auditor has determined that accounts receivable have increased due to slow collections in a “tight
money” environment, the auditor would likely
a. Increase in the allowance fro bad debts account. c. Review the credit and collection
policy.
b. Review the going concern ramifications. d. Expand tests of collectibility.

13. To gather evidence about the balance per bank in a bank reconciliation, an auditor would examine all of the
following except the
a. Cutoff bank statement. c. Bank confirmation.
b. Year-end bank statement. d. General ledger.

14. Two months before year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan by a
debit o cash and a credit to sales. Which of the following is the most effective procedure for detecting this
type of error?
a. Analyze the notes payable journal. c. Prepare a year-end bank
reconciliation.
b. Analyze bank confirmation information. d. Prepare a year-end bank transfer
schedule.

15. An auditor would be least likely to use confirmations in connection with the examination of
a. Inventories. c. Long-term debt.
b. Refundable income taxes. d. Stockholders’ equity.

16. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard
bank confirmation request for a bank account that had been closed during the year. After the client’s
treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this
audit procedure?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before the year end.
c. The request was mailed by the assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.

17. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor
when the
a. Check register for the last month is reviewed. c. Bank confirmation is reviewed.
b. Cutoff bank statement is reconciled. d. Search for unrecorded liabilities is performed.

18. An auditor compares information and canceled checks with information contained in the cash disbursement
journal. The objective of this test is to determine that
.a Recorded cash disbursement transactions are properly authorized.
.b Proper cash purchase discounts have been recorded.
.c Cash disbursement are for goods and services actually received.
d. No discrepancies exist between the date on the checks and the date in the journal.

19. 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 banks.
.c Prepare a schedule of bank transfers from the client’s books.
.d Prepare year-end bank reconciliation.

20. An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff
bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping.
d. Detect kiting.

21. Which of the following audit procedures would be most appropriate to address the existence assertion for
sales?
a. Confirm receivables balances. c. Review collectibilty.
b. Perform analytical procedures. d. Confirm cash deposits in banks.

22. Which of the following financial statement assertions is not addressed by the confirmation of accounts
receivables?
a. Existence c. Rights.
b. Presentation and disclosure. d. Valuation.

23. Audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the
balance sheet date. An aging is best used by the auditor to
a. Evaluate controls over credit sales. c. Estimate credit losses.
b. Test the accuracy of recorded charge sales. d. Verify the validity of the recorded receivables.

24. An entity’s financial statements were misstated over a period of years due to large amounts of revenue
having been recorded in journal entries that involved the debits and credits to a n illogical combination of
accounts. The auditor could most likely have been alerted to this irregularity by
a. Scanning the general journal for unusual entries.
b. Performing cutoff test at year end.
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 c. Tracing a sample of journal entries to the general ledger.
d. Examining documents supporting sales returns and allowances recorded after year end.

25. When auditing the allowance for uncollectible accounts, the least reliance should be placed on which of the
following?
a. The credit manager’s opinion.
b. An aging of past due accounts.
c. Collection experience of the client’s collection agency.
d. Ratios that show the past relationship of the allowance to net credit sales.

26. In determining the existence of accounts receivable, which of the following would the auditor consider most
reliable?
a. Documents that support the accounts receivable balance.
b. Credits to accounts receivable from the cash receipts book after the close of business at year end.
c. Direct telephone communication between auditor and debtor.
d. Confirmation relies received directly from customers.

27. An auditor confirms a representative number a representative number of open accounts receivable as of
December 31 and investigates respondents’ exceptions and comments. By this procedure, the auditor would
most likely learn of which of the following
a. One of the cashiers has been covering an embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
c. One of the computer control clerks has been removing from the data file all sales invoices applicable
to his own account.
d. The credit manager has misappropriated remittances from customers whose accounts have been
written off.

28. Customers with substantial due balances have failed to reply after second request had been mailed to them
directly. Which of the following audit procedures is most appropriate?
a. Examine shipping documents.
b. Review cash collections during the year being audited.
c. Intensify the study of internal controls for receivables.
d. Increase the balance in the accounts receivable allowance account.

29. The negative form of accounts receivable confirmation is not useful when
a. Internal control is considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe that persons receiving the request are likely to consider them.
d. Individual accounts balances are relatively large.

30. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because
a. A majority of recipients are usually unwilling to respond objectivity.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified the account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

31. You are auditing the financial statements of a small rural municipality. The receivable balances represent
residents’ delinquent real states taxes. Control risk is at the maximum. To determine the existence of the
accounts receivable balances at the balance sheet date, you would most likely
a. Send positive confirmation request.
b. Send negative confirmation request.
c. Examine evidence of subsequent cash receipts.
d. Inspect internal records such as copies the tax invoices that had been mailed to the residents.

32. The negative form of accounts receivable confirmation request is particularly useful except when
a. Control procedures surrounding accounts receivable are considered to be effective.
b. A large number of small balances are involved.
c. The auditor has reason to believe the persons receiving the request are likely to give them
consideration.
d. Individual accounts balances are relatively large.

33. Proper authorization procedures in the revenue cycle usually provide for the approval of bad debt write-offs
by an employee in which of the following departments?
a. Treasurer c. Billing
b. Sales d. Accounts receivable

34. The most likely result of ineffective internal control policies and procedures in the revenue cycle is that
a. Irregularities in recording transactions in the subsidiary accountants could result in a delay in goods
shipped.
b. Omission of shipping documents could go undetected, causing an understatement of inventory.
c. Final authorization of credit memos by personnel in the sales department could permit an employee
defalcation scheme.
d. Fictitious transactions could be recorded, causing an understatement of revenues and
overstatement of receivable.

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