Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

AT.3213
Application of Audit Process to Transaction SOLIMAN/UY/RICAFRENTE
Cycles Part 1 MAY 2022

LECTURE NOTES
Revenue and Receipt Cycle (or Sales and Collection • Write-offs approved by management official
Cycle) independent of recordkeeping responsibility (e.g., the
treasurer is appropriate)
Typical Business Process

1. Customer orders goods from the entity through variety Cash Receipts
of channels (such as the customer filling out the sales
order physically or through the entity’s e-commerce • Cash receipts received in mail listed by individuals with
platforms, orders via telephone or email, or by providing no recordkeeping responsibility
their own purchase order to the entity). § Cash goes to cashier
2. The entity’s sales personnel will process the customer § Remittance advices go to accounting
order by preparing the corresponding sales orders.
• Over-the-counter cash receipts controlled (cash register
3. The sale is approved by the credit department (this can tapes)
be done manually or electronically such as maintaining
a pre-approved credit limit for the customer.) • Cash deposited daily intact (cash expenditures for the
day should not be obtained from cash collections but
4. The goods are then shipped to the customer.
rather paid for separately through check issuance
5. The billing department (a part of accounting) prepares except for small expenditures for which a petty cash
a sales invoice (a copy of which becomes the customer’s fund is set up)
“bill”). After the sales invoice is prepared, the sales
journal, the general ledger, and the accounts receivable
• Employees handling cash are bonded (a form of
insurance to compensate the entity in case the bonded
subsidiary ledger are posted.
employee commit theft or embezzlement)
6. The customer pays the account with a check, and a
remittance advice is enclosed to describe which invoice • Lockbox, a post office box controlled by the company’s
the check is paying. As a preventive control, two bank at which cash remittances from customers are
individuals open the mail that includes these customer received. The bank collects customer remittances,
remittances. immediately credits the cash to the company’s bank
account, and forwards the remittance advices to the
7. The checks are listed and sent to the cashier who daily company. A lockbox system is considered an extremely
deposits them in the bank (the checks should not go to effective control because company employees have no
the accounting department, as that would give the access to cash and bank employees have no access to
accounting department custody of assets [checks in this the company’s accounting records.
case] as well as recordkeeping responsibility). Another
copy of the list of checks and the remittance advices is • Bank reconciliation prepared by individuals independent
sent to accounting to be used to post the cash receipts of cash receipts recordkeeping
journal, which is subsequently posted to the general and
accounts receivable subsidiary ledgers. Purchasing/Disbursement Cycle (or Acquisition and
Payment Cycle)
Major Controls
Typical Business Process
Sales
1. The requesting department sends a purchase requisition
• Credit granted by a credit department to the purchasing department.
2. The purchasing department determines the proper
• Sales orders and invoices prenumbered and controlled
quantity and vendor for the purchase and prepares a
• Sales returns are presented to receiving clerk who purchase order. One copy of the purchase order is sent
prepares a receiving report which supports to the vendor. Another copy is sent to the receiving
prenumbered sales return credit memoranda department to allow receiving personnel to know that
items received have been ordered; however, the copy
of the purchase order sent to receiving will not have a
Accounts Receivable quantity of items on it so as to encourage personnel to
count the goods when they are received.
• Subsidiary ledger reconciled to control ledger regularly
3. When the goods are received, a receiving report is
• Individual independent of receivable posting reviews prepared by the receiving department and forwarded to
statements before sending to customers the accounting department.
• Monthly statements sent to all customers 4. A vendor’s invoice or “bill” is received by the accounting
department from the vendor. When the accounting
department has the purchase order, receiving report,
and vendor’s invoice, the payment is approved and then

Page 1 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

recorded in the purchases journal since evidence exists day. At the end of each week their supervisor
that the item was ordered, received, and billed. compares job time tickets with employee clock
cards or records that have already been signed
5. A check and remittance advice is subsequently sent to
by the employees.
the vendor in accordance with the terms of the sale. The
purchase order, receiving report, and vendor’s invoice c. Salaried and other employees fill out weekly
are stamped paid to prevent duplicate payments. time summaries indicating hours worked.
3. The payroll accounting department will use the
Major Controls information from timekeeping (for the hours worked by
the employees) and the records from the human
Purchases resource department (for the authorized rates of
employees) for the proper computation of the payroll
• Prenumbered purchase orders used for the period.

• Separate purchasing department makes purchases 4. Payroll accounting department will prepare the payroll
journal and the unsigned payroll checks (or debit
• Purchasing personnel independent of receiving and advice).
recordkeeping
5. The checks are then signed by the treasurer and
• Suppliers’ monthly statements compared with distributed by an independent paymaster who has no
recorded payables other payroll functions (or the debit advice is sent to the
bank maintaining the payroll account of the entity).
Accounts Payable 6. The summary payroll entry is then posted to the general
ledger in the accounting department.
• Accounts payable personnel independent of
purchasing, receiving, and disbursements
• The internal auditing department periodically compares
• Clerical accuracy of vendors’ invoices tested the payroll department’s file on each employee with that
in the personnel department’s file to determine that no
• Purchase order, receiving report, and vendor’s unauthorized changes in payroll records have been
invoice matched made.

Cash Disbursements • Employees with cash handling and recordkeeping

responsibilities should be covered by fidelity bonds, a
• Prenumbered checks with a mechanical check form of insurance which protects an employer against
protector used losses caused by dishonest employees (fidelity bonds
also serve as a control when new employees are hired
• Two signatures on large check amounts since the insurer will typically perform a background
check on prospective employees).
• Checks signed only with appropriate support
(purchase order, receiving report, vendor’s invoice).
Major Personnel and Payroll Controls
Treasurer signs checks and mails them
• Support for checks canceled after payment • Segregate: Timekeeping; Payroll Preparation;
Personnel; Paycheck Distribution
• Voided checks mutilated, retained, and accounted
for • Time clocks used where possible

• Bank reconciliations prepared by individual • Job time tickets reconciled to time clock cards
independent of cash disbursements recordkeeping
• Time clock cards approved by supervisors (overtime
• Physical control of unused checks and regular hours)
• Treasurer signs paychecks
Personnel/Payroll Cycle
• Unclaimed paychecks controlled by someone otherwise
Typical Business Process independent of the payroll function (locked up and
eventually destroyed if not claimed). In cases in which
1. A separate personnel department (e.g. Human resource employees are paid cash (as opposed to checks)
or HR department) maintains complete, up-to-date unclaimed pay should be deposited into a special bank
records for each employee. Included in such records is account.
information on level of education, basic payroll • Personnel department promptly sends termination
information, experience, and authorization for any notices to the payroll department.
changes in pay rates.
2. Timekeeping and recording Inventory/Production Cycle (or Inventory and
a. The firm’s factory direct labor personnel use a Warehousing Cycle)
time clock (or biometric machine) to time in
each and out each working day or shift. Their Typical Business Process
employee clock card or record will show the
total hours worked each day. Inventories and production fit under the first two
cycles. However, due to the unique nature of inventories,
b. These direct labor personnel also fill out job separate coverage is warranted. Two cases will be
time tickets for each job they work on each

Page 2 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

considered here: a nonmanufacturing entity and a d. Variances may be calculated for all three
manufacturing entity. components—raw materials, direct labor, and
overhead. Variances will be allocated between
cost of goods sold and ending inventory
Trading/Retail (finished goods and work in process) based on
the proportion of items sold and those
1. A retailer is an entity who purchases products from a remaining in inventory, although any
wholesaler and then sells the goods to the public. “abnormal” waste will be directly
expensed. This allocation is necessary because
2. As in the acquisitions and payments cycle, purchase
generally accepted accounting principles
requisitions and purchase orders are used and
require that the entity report inventory based
controlled to purchase the inventory items that are of a
on the lower of actual cost and net realizable
“finished goods” nature.
value—not standard cost.
3. Likewise, when ordered goods are received, a receiving
report is filled out by personnel in the receiving
Major Inventory and Production Controls
department.
4. Perpetual inventory records are maintained for large • Perpetual inventory records for large items
amount items. The entity has calculated economic
reorder points and quantities. When quantities on hand • Prenumbered receiving reports prepared when
reach the reorder point, a purchase requisition is inventory received; receiving reports accounted for
prepared and sent to the purchasing department that • Adequate standard cost system to cost inventory items
places the order.
• Physical controls against theft
5. At the end of the year, a physical inventory is taken
during which items on hand are counted. In the case of • Written inventory requisitions used
items for which perpetual records exist, the perpetuals
are corrected for any errors—large errors should be • Proper authorization of purchases and use of
explained. For items without perpetual records, the prenumbered purchase orders
total on hand is used to adjust the cost of goods sold at
year-end (Beginning inventory + Purchases – Ending Investing Cycle: Property
inventory = Cost of goods sold).
Typical Business Process: Property, Plant and Equipment
Manufacturing
1. Property, plant, and equipment acquisitions require
1. The case of the manufacturing entity is somewhat more board of directors’ approval for purchases over a certain
involved. amount. Otherwise, the purchase is handled similarly
to a merchandise purchase.
a. There are three types of inventory accounts
involved. 2. As in the case of merchandise purchases, the item is
recorded as an addition when some form of purchase
b. First, supplies and raw materials are purchased authorization is present with a vendor’s invoice and a
from suppliers in much the same manner as receiving report.
described above for the nonmanufacturing
firm. 3. The company then selects an appropriate life and
depreciation method (e.g., straight- line, sum-of-the-
c. Second, work in process is the combination of years’ digits, double-declining balance).
raw materials, direct labor, and factory
overhead. 4. Depreciation entries are made in the general journal
with a debit to depreciation expense (manufacturing
d. Third, when the items in process have been overhead for manufacturing equipment) and a credit to
completed, they are inspected and transferred accumulated depreciation.
at their cost (typically standard cost) to finished
goods. 5. The company should also have controls to determine
that repair and maintenance expenses have not been
e. Finally, when the goods are sold, the entry is to capitalized.
credit finished goods and to debit cost of goods
sold. 6. Asset retirements are recorded by removing the asset
and accumulated depreciation from the general ledger—
2. Work in process is controlled through use of a standard a gain (loss) may occur on the transaction.
cost system as described in cost accounting courses.
7. In the case of an exchange of assets, the entity has
a. Raw materials are those that typically can be policies to determine that GAAP is properly followed in
directly identified with the product (e.g., recording the transaction.
transistors in a radio).
b. Direct labor is also identified with the product Major Property, Plant, and Equipment Controls
(e.g., assembly line labor).
c. Overhead includes materials not specifically • Major asset acquisitions are properly approved by the
identified with the product (amount of glue firm’s board of directors and properly controlled through
used) and supervisory, non-administrative capital budgeting techniques.
labor. • Detailed records are available for property assets and
accumulated depreciation.

Page 3 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

• Written policies exist for capitalization vs. expensing

decisions. Financing Cycle (or Financing and Repayment Cycle)

• Depreciation properly calculated. Typical Business Process

• Retirements approved by an appropriate level of
management. 1. This cycle includes issuance and repurchase of debt
(bank loans, mortgages, bonds payable) and shares of
• Physical control over assets to prevent theft. stocks, and payment of interest and dividends.
• Periodic physical inspection of plant and equipment by 2. Debt and capital stock transactions should be
individuals who are otherwise independent of property, authorized by the board of directors.
plant, and equipment (e.g., internal auditors).
3. Often an independent trustee issues bonds, monitors
company compliance with the provisions of the debt
Investing Cycle: Security agreement, and pays interest.
4. For share capital transactions, corporations may either
Typical Business Process: Debt and Equity Investments
employ an independent stock registrar and a stock
transfer agent, or handle their own transactions.
Investments may be categorized as marketable securities
and long-term investments. Purchases are recorded proper 5. Generally, internal control is stronger when a stock
amounts. registrar and a stock transfer agent are used. A stock
registrar’s primary responsibility is to verify that stock
Major Investment Controls is issued in accordance with the authorization of the
board of directors and the articles of incorporation; the
• Segregation of duties among the individuals authorizing stock transfer agent’s primary responsibility is
purchases and sales of securities, maintaining custody maintaining detailed stockholder records and carrying
of the securities, and maintaining the records of out transfers of stock ownership.
securities
• Use of an independent agent such as a stockbroker, Major Financing Controls
bank or trust company to maintain custody of securities
• Debt and equity transactions are properly approved by
• Securities not in the custody of an independent agent the company’s board of directors.
maintained in a bank safe-deposit box under the joint
control of the treasurer and one other company official; • An independent trustee handles bond transactions.
both individuals should be present to gain access
• A stock registrar and a stock transfer agent handle
• Registration of securities in the name of the company capital stock transactions.

• Detailed records of all securities and related revenue • Canceled share certificates are defaced (cancelled) to
from interest and dividends prevent their reissuance.

• Periodical physical inspection of securities by individuals

with no responsibility for the authorization, custody, or
recordkeeping for investments

DISCUSSION QUESTIONS
transfer goods to customers or provides services to their
1. Which of the following is an account that is not affected customers.
by the sales and collection cycle? a. True, False
a. Cash b. False, True
b. Allowance for doubtful accounts c. True, True
c. Accounts receivable d. False, False
d. Fixed assets
4. Which of the following is not one of the classes of
2. The auditor's objectives for the sales and cash transactions included in the sales and collection cycle?
collections activities when the client is primarily an e- a. Sales returns and allowances
commerce business as compared to a traditional b. Write-off of uncollectible accounts
physical business are: c. Cash receipts
a. unchanged. d. Interest Expense
b. expanded.
c. mitigated. 5. What event initiates a transaction in the sales and
d. decreased. collection cycle?
a. Receipt of cash
3. The overall objective in the audit of the sales and b. Delivery of product to a customer
collection cycle is to evaluate whether the account c. Identification of a new customer
balances affected by the cycle are fairly presented in d. Customer request for goods
accordance with accounting standards.

The sales and collection cycle applies to businesses that

Page 4 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

6. A ________ is a document that indicates a request for 15. For a firm that practices good internal controls in the
merchandise by a customer. sales and collections cycle, the function of indicating
a. sales invoice credit approval should be recorded on which of the
b. vendor invoice following documents?
c. customer order a. Sales order
d. sales order b. Sales invoice
c. Customer order
7. A ________ is a document that is matched with the d. Remittance advice
customer order to assure that the correct quantity and
type of goods are shipped. 16. Credit memos are normally issued to:
a. sales order a. adjust the customers balance to the amount owed
b. customer order to the company because of returned goods or an
c. vendor invoice allowance.
d. sales invoice b. assist in the aging of accounts receivable.
c. reduce customer frustration and sales losses.
8. What critical event must take place before goods can be d. inform the customer of the balance due.
shipped in order to assure payment can be reasonably
expected? 17. When processing and recording cash receipts, an
a. Determination of correct delivery address important fact to consider is:
b. Credit approval a. the most important concern is depositing cash at
c. Matching of shipping document with sales invoice least twice daily.
d. Receipt of sales order from the customer b. the most important concern is the possibility of
theft.
9. A document prepared to initiate shipment of the goods c. theft can occur only after the receipts are entered
sold by an independent shipper is the: in the records.
a. sales order. d. it the customer fails to include a remittance advice,
b. bill of lading. the check should be returned to the customer.
c. sales invoice.
d. customer order. 18. When designing audit procedures, tracing of source
documents to the customers subsidiary ledger and
10. The document used to indicate to the customer the subsequently to the general ledger is done to satisfy
amount of a sale and payment due date is the: what assertion?
a. sales invoice. a. Valuation
b. bill of lading. b. Cutoff
c. purchase order. c. Completeness
d. sales order. d. Classification

11. Generally, when is the earliest point in the sales and 19. When assessing risk control, the auditor must do all of
collection cycle in which revenue can be recognized? the following except:
a. When the sale is approved a. assess control risk for each objective by evaluating
b. When the credit approval process is finalized the controls and deficiencies for each objective.
c. When the cash is collected b. perform the detailed test of balances.
d. When the goods have been shipped c. identify the key internal controls and deficiencies.
d. associate the key controls and deficiencies with the
objectives.
12. The total of the individual account balances in the
accounts receivable subsidiary ledger should equal the:
a. total sales for the period. 20. When sales invoices are automatically calculated and
b. balance of the sales account in the general ledger. posted by a computer, the auditor may be able to
c. total sales less the total cash received for the reduce substantive tests of transactions for which, if
period. any, assertion?
d. balance of the accounts receivable account in the a. Accuracy
general ledger. b. Existence
c. Completeness
d. None of the above
13. In the accounts receivable subsidiary ledger the length
of time the account has been due can be useful to the
client and the auditor in preparing the: 21. Which one the following procedures performed for the
a. trial balance. billing function provides evidence for the completeness
b. working trial balance. assertion?
c. accounts receivable trial balance. a. Making sure that all shipments have been billed
d. aged accounts receivable trial balance. b. Making sure that no shipment has been billed more
than twice
c. Making sure that each shipment is billed at the
14. Which of the following is a business function related to
correct amount
sales returns and allowances?
d. Making sure that each shipment is billed to the
a. Processing customer orders
proper customer
b. Writing off uncollectible accounts
c. Processing and recording credit memos
22. When assessing planned control risk for sales:
d. Granting credit
a. the key internal controls and deficiencies for sales
will be the same for every company.

Page 5 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

b. the audit objectives for sales will differ from shipment was made
company to company. b. Sales to related parties, such as officers and
c. a flowchart is required to help assess control risk for subsidiaries
sales. c. Sales recorded more than once
d. assessing control risk for sales is a highly subjective d. Shipments being made to nonexistent customers
decision. and recorded as sales

23. In determining the level of audit efficiency, once the 30. Smith Manufacturing Company's accounts receivable
auditor has identified the key internal controls and clerk has a friend who is also a Smith's customer. The
identified any deficiencies in order to determine the accounts receivable clerk has issued fictitious credit
level of control risk appropriate for a private company memos to his friend for goods supposedly returned. The
client, it is appropriate to decide whether: most effective procedure for preventing this activity is
a. substantive tests can be reduced sufficiently to to:
justify costs of performing tests of controls. a. prenumber and account for all credit
b. substantive tests can be increased sufficiently to memorandums.
justify costs of performing tests of controls. b. require receiving reports that provide evidence of
c. tests of controls can be increased sufficiently to returned inventory items to support all credit
justify costs of performing substantive tests. memorandums before they are approved.
d. tests of controls can be reduced sufficiently to c. have independent sales and accounts receivable
justify costs of performing substantive tests. departments.
d. mail monthly statements to customers.
24. To test for recorded sales for which there were no actual
shipments, the auditor vouches from the: 31. When an employee who is authorized to make customer
a. bill of lading to the sales journal. entries in the accounts receivable subsidiary ledger,
b. sales journal to the shipping documents. purposefully enters cash received into the wrong
c. sales journal to the accounts receivable subsidiary customer's account that employee may be suspected
ledger. of:
d. bill of lading to the supporting customer order and a. kiting.
sales order. b. lapping.
c. floating.
d. shorting.
25. An effective procedure to test for unbilled shipments is
to trace from the:
32. The audit procedure referred to as proof of cash receipts
a. sales journal to the shipping documents.
is particularly useful to test:
b. shipping documents to the sales journal.
a. time lags in making deposits.
c. sales journal to the accounts receivable ledger.
b. whether all recorded cash receipts have been
d. sales journal to the general ledger sales account.
deposited in the bank.
c. whether there are cash receipts that have not been
26. To determine that sales are accurately recorded, the recorded in the journals.
unit prices on the duplicate sales invoices are normally d. the client's reconciliation between cash receipts and
compared with: bank deposits.
a. the original invoices.
b. an approved master price list. 33. Which of the following would offer the best protection
c. the amounts recorded in the sales journal for that for a company that wishes to prevent a reoccurrence of
transaction. a previously detected "lapping" problem with trade
d. the amounts posted to the customer's account in accounts receivable?
the accounts receivable master file. a. Segregate duties so that the bookkeeper in charge
of the general ledger has no access to incoming
27. Prenumbered documents are intended to help: mail.
Prevent duplicate b. Segregate duties so that no employee has access to
Prevent the failure to billings or recordings of both checks from customers and currency from
bill or record sales sales daily cash receipts.
a. Yes Yes c. Have customers send payments directly to the
b. No No company's depository bank.
c. Yes No d. Request that customer's payment checks be made
d. payable to the company and addressed to the
No Yes
treasurer.

28. Which one of the following best describes the auditors 34. The auditor's primary concern in performing audit
responsibilities regarding appropriate authorizations in procedures of the write-off of uncollectible accounts
the sales/collections cycle? relates to the risk that the client writes offs customer
a. B, C, and D should all be of concern to the auditor. accounts that have already been collected. The primary
b. Credit must be authorized before the sale. control for preventing this fraud is:
c. Goods must be shipped after the authorization. a. examining authorized credit memos.
d. Prices must be authorized. b. examining the uncollectible account authorization
form.
29. Which one of the following is of the least concern to the c. examining debit memos.
auditor when designing substantive tests of d. examining the vouchers payable register.
transactions for the sales/collection cycle?
a. Sales being included in the journal for which no

Page 6 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

35. The two primary classes of transactions in the sales and c. by fraud only.
collection cycle are: d. randomly without causes related to errors or fraud.
a. sales and sales discounts.
b. sales and cash receipts. 44. Which of the following is likely to be determined first
c. sales and sales returns. when performing tests of details for accounts
d. sales and accounts receivable. receivable?
a. Recorded accounts receivable exist.
36. The appropriate and sufficient evidence to be obtained b. Accounts receivable in the aged trial balance agree
from tests of details must be decided on an: with related master file amounts, and the total is
a. efficiency basis. correctly added and agrees with the general ledger.
b. effectiveness basis. c. Accounts receivable are owned.
c. audit objectives basis. d. Existing accounts receivable are included.
d. none of the above.
45. An auditor is performing a credit analysis of customers
37. Auditors are especially concerned with three aspects of with balances over 60 days due. She is most likely
internal control for the sales and collection cycle. Which obtaining evidence for which audit related objective?
of the following is not one of their major concerns? a. Realizable value
a. Controls over cutoff b. Existence
b. Controls that prevent or detect embezzlements c. Completeness
c. Controls over sales discounts d. Occurrence
d. Controls related to the allowance for uncollectible
accounts 46. The most important test of details of balances to
determine the existence of recorded accounts
38. Which of the following types of receivables would not receivable is:
deserve the special attention of the auditor? a. tracing details of sales invoices to shipping
a. Accounts receivables with credit balances documents.
b. Accounts that have been outstanding for a long time b. tracing the credits in accounts receivable to bank
c. Receivables from related parties deposits.
d. Each of the above would receive special attention. c. tracing sales returns entries to credit memos issued
and receiving room reports.
39. Analytical procedures are substantive tests and, if the d. the confirmation of customers' balances.
results of the analytical procedures are favorable, the
auditor would normally: 47. Confirmation of accounts receivable selected from the
a. reduce the extent of tests of details of balances. trial balance is the most common test of details of
b. reduce the extent of tests of controls. balances for the ________ of accounts receivable.
c. reduce the tests of transactions. a. presentation
d. reduce all of the other tests. b. valuation
c. accuracy.
40. An auditor is comparing the write-off of uncollectible d. detail tie-in
accounts as a percentage of total accounts receivable
with previous years. A possible misstatement this 48. If the client's internal control for recording sales returns
procedure could uncover is: and allowances is evaluated as ineffective:
a. overstatement or understatement of sales. a. a larger sample may be needed to verify cutoff.
b. overstatement or understatement of accounts b. sampling is not appropriate.
receivable. c. all sales returns must be traced to supporting
c. overstatement or understatement of bad debt documentation.
expense. d. all sales returns must be confirmed with the
d. overstatement or understatement of sales returns customer.
and allowances.
49. Which of the following audit procedures would not likely
41. The understatement of sales and accounts receivable is detect a client's decision to pledge or factor accounts
best uncovered by: receivable?
a. testing internal controls. a. A review of the minutes of the board of directors'
b. testing the aged accounts receivable trial balance. meetings
c. substantive tests of transactions for shipments b. Discussions with the client
made but not recorded. c. Confirmation of receivables
d. substantive tests of transactions for bad debts. d. Examination of correspondence files

42. Audit procedures designed to uncover credit sales made

50. When do most companies record sales returns and
after the client's fiscal year end that relate to the current
allowances?
year being audited provide evidence for which of the
a. During the month in which the sale occurs
following audit objective?
b. During the accounting period in which the return
a. Realizable value
occurs
b. Accuracy
c. Whenever the customer contacts the company
c. Cutoff
regarding the credit
d. Existence
d. During the month after the sale occurs
43. Cutoff misstatements occur:
a. either by error or fraud. 51. The most important aspect of evaluating the client's
b. by error only. method of obtaining a reliable cutoff is to:
a. perform extensive detailed testing of cutoff.

Page 7 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

b. evaluate the client's control procedures around

cutoff. 59. Which of the following is the principle "weakness" of
c. confirm a sample of transactions near period end using negative confirmations for your tests of details of
with customers. balances for accounts receivable?
d. confirm transaction with customers. a. They can only be used for large balance accounts.
b. They cannot not be used when account balances
52. Which of the following audit procedure would normally "bunch" around a mean value.
be included in the audit plan when auditing the c. Conclusions drawn from receiving no reply may not
allowance for doubtful accounts? be correct.
a. Send positive confirmations. d. Response rates are generally too low to draw any
b. Inquire of the client's credit manager. conclusions.
c. Send negative confirmations.
d. Examine sales invoices. 60. Communication addressed to the debtor requesting him
or her to confirm whether the balance as stated on the
53. Generally accepted accounting principles require that communication is correct or incorrect is a:
revenue be reported net of sales returns and a. representation letter.
allowances: b. negative confirmation.
a. if practical. c. bank confirmation.
b. if required by industry practice. d. positive confirmation.
c. if the amounts are material.
d. any of the above. 61. A type of positive confirmation known as a blank
confirmation:
54. If material, all of the following are required to be a. requests the recipient to fill in the amount of the
separately disclosed in the financial statements except balance.
for: b. is considered less reliable than the regular positive
a. accounts receivable from officers. confirmation.
b. accounts receivable from affiliates. c. generates as high a response rate as the regular
c. sales and assets for different business segments. positive confirmation form.
d. sales for the last ten days of the fiscal year. d. is used when the auditor is confirming several small
balances.
55. For effective internal control, employees maintaining
the accounts receivable subsidiary ledger should not 62. When positive confirmations are used, auditing
also approve: standards require alternative procedures for
a. employee overtime wages. confirmations not returned by the customer. Which of
b. credit granted to customers. the following would not be considered an alternative
c. write-offs of customer accounts. procedure?
d. cash disbursements. a. Send a second confirmation request.
b. Examine subsequent cash receipts to determine if
56. One of the shortcomings in evaluating the allowance for the receivable has been paid.
uncollectible accounts by reviewing individual c. Examine shipping documents to verify that the
noncurrent balances on the aged trial balance is: merchandise was shipped.
I. it is difficult to compare the results of the current d. Examine customer's purchase order and the
year with those of the previous year. duplicate sales invoice to determine that the
II. current accounts are ignored in establishing the merchandise was ordered.
adequacy of the allowance.
a. I only 63. Confirmation of accounts receivable balances normally
b. II only provides evidence concerning the:
c. both I and II a. valuation of the balances.
d. neither I or II b. rights of the balances.
c. existence of the balances.
57. When designing tests of details of balances, an d. completeness of the balances.
important point to remember is:
a. auditors emphasize income statement accounts. 64. If the auditor decides not to confirm accounts
b. the audit procedures selected depends heavily on receivable, the auditor should:
whether planned evidence for a given objective is a. always use alternative procedures to audit the
low, medium, or high. accounts receivable.
c. if accounts receivable are overstated, then sales will b. include copies of customer statements in the audit
be understated. files.
d. sales cutoff is the most important test of details of c. document the reasons for such a decision in the
accounts receivable. audit files.
d. include copies of customer sales invoices in the
58. The net realizable value of accounts receivable is equal audit files.
to:
a. gross accounts receivable less allowance for
65. The most reliable evidence from confirmations is
uncollectible accounts.
obtained when they are sent:
b. gross accounts receivable less bad debt expense.
a. as close to the balance sheet date as possible.
c. gross accounts receivable less returns and
b. at various times throughout the year to different
allowances.
segments of the sample, so that the entire sample
d. gross accounts receivable less sales discounts.
is representative of account balances scattered

Page 8 of 9 www.teamprtc.com.ph AT.3213

EXCEL PROFESSIONAL SERVICES, INC.

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.

End of AT.3213

Page 9 of 9 www.teamprtc.com.ph AT.3213