Unit II - A Audit of The Revenue and Receipt Cycle

QUESTIONS

II – 1. On receiving a client’s bank cutoff statement, an audit most likely would trace

a. Prior-year checks listed in the cutoff statement to the year-end outstanding

checklist.
b. Deposits in transit listed in the cutoff statement to the year-end bank
reconciliation.
c. Checks dated after year-end listed in the cutoff statement to the year-end
outstanding checklist.
d. Deposits recorded in the cash receipts journal after year-end to the cutoff
statement.

II – 2. An auditor observed that a client mails monthly statements to customers.

Subsequently, the auditor reviewed the evidence of follow-up on the errors
reported by the customers. This test of controls most likely was performed
to support management’s financial statement assertion(s) of

Presentation and Rights and

disclosure obligations

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

II – 3. Which of the following characteristics most likely would be indicative of

check kiting?

a. High turnover of employees who have access to cash

b. Many large checks that are recorded on Mondays.
c. Low average balance compared to high level of deposits.
d. Frequent ATM checking account withdrawals.

II – 4. Which of the following fraudulent activities most likely could be

perpetrated due to the lack of effective internal controls in the revenue cycle?

a. Fictitious transactions may be recorded that cause an understatement of

revenues and overstatement of receivables.
b. Claims received from customers for goods returned may be intentionally
recorded in other customers’ accounts.
c. Authorization of credit memos by personnel who receive cash may permit the
misappropriation of cash.
d. The failure to prepare shipping documents may cause an overstatement of
inventory balances
II – 5. Which of the following procedures concerning accounts receivable would
an auditor most likely perform to obtain evidential matter in support of
an assessed level of control risk below the maximum level?

a. Observing an entity’s employee prepares the schedule of past due

accounts receivable.
b. Sending confirmation requests to an entity’s principal customers
to verify the existence of accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for
unusual balances.
d. Comparing an entity’s uncollectible expense to actual
uncollectible accounts receivable.

II – 6. An auditor suspects that a client’s cashier is misappropriating cash receipts

For personal use by lapping customer checks received in the mail. In attempting
to uncover this embezzlement scheme, the auditor most likely would compare the

a. Dates checks are deposited per bank statements with the dates
remittance credits are recorded.
b. Daily cash summaries with sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly
bank statements.
d. Dates uncollectible accounts are authorized to be written off with the
dates the write-offs are actually recorded.

II – 7. Which of the following internal controls most likely would reduce the risk
Of version of customer receipts by an entity’s employees?

a. A bank lockbox system.

b. Prenumbered remittance advice.
c. Monthly bank reconciliations,
d. Daily deposit of cash receipts.

II – 8. Sound internal control dictates that, immediately upon receiving checks

from customers by mail, a responsible employee should

a. Add the checks to the daily cash summary.

b. Verify that each check is supported by a prenumbered sales invoice.
c. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.

II – 9. Which of the following procedures most likely would not be an internal

control designed to reduce the risk of errors in the billing process?

a. Comparing control totals for shipping documents with corresponding

totals for sales invoices.
 b. Using computer-programmed controls on the pricing and mathematical
accuracy of sales invoices.
c. Matching shipping documents with approved sales orders before invoice
preparation.
d. Reconciling the control totals for sales invoices with the accounts receivable
subsidiary ledger.

II – 10. Proper authorization of write-offs of uncollectible accounts should be approved

in which of the following departments?

a. Accounts receivable.
b. Credit.
c. Accounts payable.
d. Treasurer.

II – 11. Upon receipt of customers’ checks in the mailroom, a responsible employee

should prepare a remittance listing that is forwarded to the cashier. A copy of
the listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions.

b. Treasurer to compare the listing with the monthly bank statement.
c. Accounts receivable bookkeeper to update the subsidiary
accounts receivable records.
d. Entity’s banks to compare the listing with the cashier’s deposit slip.

II – 12. An auditor tests an entity’s control of obtaining credit approval before

shipping goods to customers in support of management’s financial statement
assertion of

a. Valuation of allocation
b. Completeness
c. Existence or occurrence
d. Right and obligations

II – 13. Which of the following internal controls most likely would assure that all
billed sales are correctly posted to the accounts receivable ledger?

a. Daily sales summaries are compared to daily posting to the

accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the
general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.
II – 14. Which of the following audit procedures would an editor most likely
perform to test controls relating to management’s assertion concerning
the completeness of sales transactions?

a. Verify that extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
b. Inspect the entity’s reports of prenumbered shipping documents that have not
been recorded in the sales journal.
c. Compare the invoiced prices on prenumbered sales invoices to the entity’s
authorized price list.
d. Inquire about the entity’s credit granting policies and the consistent application
of credit checks.

II – 15. An auditor’s purpose in reviewing credit ratings of customers with

delinquent accounts receivable most likely is to obtain evidence
concerning management’s assertion about

a. Valuation or allocation.
b. Presentation and disclosure.
c. Existence or occurrence.
d. Rights and obligations.

II – 16. The usefulness of the standard bank confirmation request may be

limited because the bank employee who completes the form may:

a. Not believe that the bank is obligated to verify confidential information to a

third party.
b. Sign and return the form without inspecting the accuracy of the client’s bank
reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.

II – 17. To achieve good internal control, which department should perform

the activities of matching shipping documents with sales orders and preparing
daily sales summaries?
a. Billing
b. Shipping
c. Credit
d. Sales order

II – 18. Which of the following would the auditor consider to an incompatible

operation for a cashier if the cashier receives remittances from the mailroom?
a. Posting the receipts to the accounts receivable subsidiary ledger cards.
b. Making the daily deposit at the local bank.
c. Preparing the daily deposit.
d. Endorsing the checks.
II – 19. The most likely result of ineffective internal controls in the sales cycle is that

a. Fictitious transactions could be recorded, causing an understatement of

revenues and an overstatement of receivables.
b. Irregularities in recording transactions in the subsidiary accounts could delay
the shipment of goods.
c. Omission of shipping documents could go undetected, causing an
understatement of inventory.
d. Final authorization of credit memos by personnel in the sales department could
permit an employee defalcation scheme.

II – 20. For the most effective internal control, monthly bank statements should
be received directly from the banks and reviewed by the

a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.

II – 21. Which of the following describes the most effective preventive control to
ensure proper handling of cash receipt transactions?

a. Have bank reconciliation prepared by an employee not involved with cash

collections and then have them reviewed by a supervisor.

b. Have one employee issue a prenumbered receipt for all cash collections; have
another employee match daily total of prenumbered receipts to bank deposits.

c. Use predetermined totals ( hash totals ) of cash receipts to control posting

routines.
d. Have the employee who receives customer mail prepare the daily bank deposit;
have another employee actually make the deposit.

II – 22. As payments are received, one mailroom employee is assigned the

responsibility of prelisting receipts and preparing the deposit slip prior
to forwarding the receipts, the deposit slip, and the remittance advice to
the deposit slip, stamp a restrictive endorsement on the back of each
check, and then forward the receipts and the deposit slip to the
treasury department. Which of the following is a reasonable assessment
of internal control in this process?

a. Internal control is adequate.

b. Internal control is inadequate because mailroom employees should not have
access to cash.
 c. Internal control is inadequate because treasury employees should not have
prepare the deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.

II – 23. For effective internal control, 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.

II – 24. During an audit of the accounts receivable function, you found that
the accounts receivable turnover rate had fallen from 7.3 to 4.3 over the
last three years. What is the most likely cause of the decrease?

a. An increase in the discount offered for early payment.

b. A more liberal credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales.

II – 25. Shipping documents should be traced to and compared with sales records
or invoices to

a. Determine whether payments are properly applied to customer accounts.

b. Ensure that shipments are billed to customers.
c. Determine whether unit prices are billed in accordance with sales contracts.
d. Ascertain whether all sales are supported by shipping document

II – 26. This caselette is designed to test your proficiency and competence in

audit planning and test of controls.

Santos, CPA, has just accepted an engagement to audit the financial

statements of Southern Visayas Forwarders, Inc. for the year ending
December 31, 20X7. After obtaining an understanding of the client’s
design of the accounting and internal control systems and their operations,
he then proceed in performing test of controls related to revenue and
collection activities.

The following questions relate to the test of controls of the revenue

and collection cycle. Choose the best response.
 Questions:
1. Shipping documents should be traced to and compared with sales records or
invoices to

a. Determine whether payments are properly applied to customer accounts.

b. Ensure that shipments are billed to customers.
c. Determine whether unit prices billed are in accordance with sales contracts.
d. Ascertain whether all sales are supported by shipping documents.

2. The auditor noted that the accounts receivable department is separate from
other accounting activities. Credit is approved by a separate credit department.
Control accounts and subsidiary ledgers are balanced monthly. Similarly,
accounts are aged monthly. The accounts receivable manager writes off
delinquent accounts after one year or sooner, if bankruptcy or other unusual
circumstances is involved. Credit memoranda are prenumbered and must
correlate with receiving reports. Which of the following areas could be viewed
as an internal control weakness of the organization?

3. Checks from customers are received in the company mailroom each day. Which
of the following controls should be in place to safeguard them?

a. Establish a separate post office box for customer payments.

b. Forward all checks to the cashier upon receipt.
c. Require a specific mail clerk to list and restrictively endorse each check.
d. Provide bonding protection for mail clerks.

4. To determine whether an entity’s internal control operated effectively to

minimize errors of failure to post invoices to the customers’ accounts ledger,
the auditor would select a sample of transactions from the population
represented by the

a. Customer order file.

b. Bill of lading file.
c. Subsidiary customers’ accounts ledger.
d. Sales invoice file.

5. The most likely to result to ineffective internal controls in the sales cycle is that

a. Fictitious transactions could be recorded, causing an understatement of

revenues and an overstatement of receivables.
b. Irregularities in recording transactions in the subsidiary accounts could delay
the shipment of the goods.
c. Omission of shipping documents could go undetected, causing an
understatement of inventory
d. Final authorization of credit memos by personnel in the sales department
could permit an employee defalcation scheme.
II – 27. This caselette is designed to test your proficiency and competence in audit
planning and test of controls.

Domingo, CPA, has just received an engagement to audit the financial statements of
Blast Forward, Inc. for the year ending December 31, 20X7. After obtaining an
understanding of the client’s design of the accounting and internal control systems
and their operation, he then proceeded in performing test of controls related to
revenue and collection activities.

The following questions relate to the test of controls of the revenue and collection
cycle. Choose the best response.

Questions:
1. As payments are received, one mailroom employee is assigned the
responsibility of relisting receipts and preparing the deposit slip prior to
forwarding the receipts, the deposit slip, and the remittance advices to accounts
receivable for posting. Accounts receivable personnel refoot the deposit slip,
stamp a restrictive endorsement on the back of each check, then forward the
receipts and the deposit slip to the treasury department. Which of the following
is a reasonable assessment of internal control in this process?

a. Internal control is adequate.

b. Internal control is inadequate because mailroom employees should not have
access to cash.
c. Internal control is inadequate because treasury employees should prepare
the deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.

2. For effective internal control, 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.

3. To achieve good internal control, which department should perform the

activities of matching shipping documents with sales orders and preparing daily
sales summaries?

a. Billing
b. Shipping
c. Credit
d. Sales order
 4. For the most effective internal control, monthly bank statements should not be
received directly from the banks and reviewed by the

a. Controller
b. Cash receipts accountant
c. Cash disbursement accountant
d. Internal auditor

5. If in the audit of the accounts receivable functions, you found that the accounts
receivable turnover rate had fallen from 7.3 to 4.3 over the last three years.
What is the most likely cause of decrease?

a. An increase in the discount offered for early payment.

b. A more liberal credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales.

II – 28. Rose Ramos, CPA, is auditing the Financial Statements of Kapwa, Inc. for the
year ended January 31. 20X7. Rose has compiled a list of possible risks,
including both errors and fraud that may result in the misstatement of
Kapwa’s financial statements and a corresponding list of internal control that,
if properly designed and implemented, could assist Kapwa in preventing
or detecting the errors and fraud.

For each possible risk ( possible errors and frauds ) number 1 through 5, select one
internal control procedure from the given choices that, if properly designed and
implemented, most likely could assist Kapwa in preventing or detecting the errors
and irregularities.

Questions:
1. Customers’ checks are credited to incorrect customer accounts.

a. Monthly statements are mailed to all customers with outstanding balances.

b. Shipping clerks compare good received from the warehouse with approved
sales orders.
c. Customer orders are compared with the inventory master file to determine
whether items ordered are in stock.
d. Daily summaries are compared with control totals of invoices.

2. Different customer accounts are each credited for the same cash receipt.

a. Total amounts posted to the accounts receivable ledger from remittance

advices are compared with the validated bank deposit slip.
b. Prenumbered credit memos are used for granting credit for goods returned.
 c. Goods returned for credit are approved by the supervisor of the sales
department.
d. Remittance advices are separated from the checks in the mailroom and
forwarded to the accounting department.

3. Customers’ checks are properly credited to customer accounts and are properly
deposited, but errors are made in recording receipts in the cash receipts journal.

a. Total amounts posted to the accounts receivable ledger from remittance

advices are compared with the validated bank deposit slip.
b. The cashier examines each check for proper endorsement.
c. An employee, other than the bookkeeper, periodically prepares a bank
reconciliation.
d. Validated deposit slips are compared with the cashier’s daily cash
summaries.

4. Customers’ checks are misappropriated after being forwarded to the cashier for
deposit.

a. Goods returned for credit are approved by the supervisor of the sales
department.
b. Remittance advices are separated from the checks in the mailroom and
forwarded to the accounting department.
c. The cashier examines each check for proper endorsement.
d. Total amounts posted to the accounts receivable ledger from remittance
advices are compared with the validated bank deposit slip.

5. Invalid transactions granting credit for sales returns are recorded.

a. Sales invoices are compared with the shipping documents and approved
customer orders before invoices are mailed.
b. Prenumbered credit memos are used for granting credit for goods returned.
c. Remittance advices are separated from the checks in the mailroom and
forwarded to the accounting department.
d. Goods returned for credit are approved by the supervisor of the sales
department.

II – 29. Rose Ramos, CPA, is auditing the Financial Statements of Kapwa, Inc. for the
Year ended January 31. 20X7. Rose has compiled a list of possible risks,
including both errors and fraud that may result in the misstatement of
Kapwa’s financial statements and a corresponding list of internal control that,
if properly designed and implemented, could assist Kapwa in preventing
or detecting the errors and fraud.
For each possible risk ( possible errors and frauds ) number 1 through 5,
select one internal control procedure from the given choices that, if
properly designed and implemented, most likely could assist Kapwa in
preventing or detecting the errors and irregularities.

Questions:
1. Invoices for goods sold are posted to incorrect customer accounts.
a. Shipping clerks compare goods received from the warehouse with the
details on the shipping documents.
b. Approved sales orders are required for goods to be released from the
warehouse.
c. Monthly statements are mailed to all customers with outstanding balances.
d. Shipping documents are compared with sales invoices when goods are
shipped.

2. Goods ordered by customers are shipped but are not billed to anyone.

a. Shipping documents are compared with sales invoices when goods are
shipped.
b. Shipping clerks compare goods received from the warehouse with approved
sales orders.
c. Customer orders are compared with the inventory master file to determine
whether items ordered are in stock.
d. Shipping clerks compare goods received from the warehouse with the
details on the shipping the documents.

3. Invoices are sent for shipped goods and are recorded in the sales journal but are
not posted to any customer account.

a. Customer orders are compared with the inventory master file to determine
whether the items ordered are in stock.
b. Control amounts posted to the accounts receivable ledger are compared
with control totals of invoices.
c. Shipping clerks compare goods received from the warehouse with approved
sales orders.
d. Daily sales summaries compared with control totals of invoices.

4. Credit sales are made to individuals with unsatisfactory credit ratings.

a. Customer orders are compared with an approved customer list.

b. Sales invoice are compared with the master price file.
c. Sales orders are prepared for each customer order.
d. Control amounts posted to the accounts receivable ledger are compared
with control totals of invoices.
5. Goods are removed from inventory for unauthorized orders.

a. Shipping clerks compare goods received from the warehouse with the
details on the shipping documents.
b. Monthly statements are mailed to all customers with outstanding balances.
c. Approved sales orders are required for goods to be release from the
warehouse.
d. Shipping clerks compare goods received from the warehouse with approved
sales orders.
 Answer Key

1. A 11. C 21. B
2. C 12. A 22. B
3. C 13. A 23. C
4. C 14. B 24. B
5. A 15. A 25. B
6. A 16. D
7. A 17. A
8. C 18. A
9. D 19. D
10. D 20. D

II – 26. II – 28.
1. B 1. A
2. A 2. A
3. C 3. C
4. D 4. D
5. D 5. D

II- 27. II – 29.

1. B 1. C
2. C 2. A
3. A 3. B
4. D 4. A
5. B 5. C