Dr.

Marwan El Rashedy 0122-162-68-24

Dr. Marwan El Rashedy 0122-162-68-24
 Chapter 13 Audit of the Sales and Collection Cycle: Tests of Controls
and Substantive Tests of Transactions
1) Which of the following is an account that is not affected by the sales and collection cycle?
A) cash
B) accounts receivable
C) allowance for doubtful accounts
D) accounts payable
Answer: D

2) Which of the following is not one of the five classes of transactions included in the sales
and collection cycle?
A) sales returns and allowances
B) write-off of uncollectible accounts
C) bad debt expense
D) interest income
Answer: D

3) What event initiates a transaction in the sales and collection cycle?

A) receipt of cash
B) delivery of product to a customer
C) identification of a new customer
D) customer request for goods or services
Answer: D

4) A ________ is a document that indicates a request for merchandise by a customer.

A) sales invoice
B) vendor invoice
C) customer order
D) sales order
Answer: C

5) A ________ is a document for communicating the description, quantity, and related

information for goods ordered by a customer.
A) sales order
B) customer order
C) vendor invoice
D) sales invoice
Answer: A

6) What critical event must take place before goods can be shipped in order to assure
payment can be reasonably expected?
A) determination of correct delivery address
B) credit approval
C) matching of shipping document with sales invoice
D) receipt of sales order from the customer
Answer: B
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7) Before goods are shipped on account, a properly authorized person must
A) prepare the sales invoice.
B) approve the journal entry.
C) approve the customer's credit.
D) verify that the unit price is accurate.
Answer: C

8) One type of shipping document is the ________, which is a written contract between the
carrier and the seller of the receipt and shipment of goods.
A) sales order
B) bill of lading
C) sales invoice
D) customer order
Answer: B

9) The document used to indicate to the customer the amount of a sale and payment due
date is the
A) sales invoice.
B) bill of lading.
C) purchase order.
D) sales order.
Answer: A

10) Which of the following is not an important aspect of billing?

A) All shipments made have been billed.
B) No shipment has been billed more than once.
C) Each customer is billed for the proper amount.
D) Credit is approved to customers for sales on account.
Answer: D

11) Most companies recognize sales revenue when

A) sales are invoiced.
B) payment is received from the customer.
C) goods are shipped.
D) the customer's order is received.
Answer: C

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12) Which of the following is not a business function within the "Sales" class of
transactions?
A) processing customer orders
B) granting credit
C) processing and recording sales returns and allowances
D) shipping goods
Answer: C

13) The total of the individual account balances in the accounts receivable master file
should equal the
A) total sales for the period.
B) balance of the sales account in the general ledger.
C) total sales less the total cash received for the period.
D) balance of the accounts receivable account in the general ledger.
Answer: D

14) In the accounts receivable master file, the length of time the account has been due can
be useful to the client and the auditor in preparing the
A) trial balance.
B) working trial balance.
C) accounts receivable trial balance.
D) aged accounts receivable trial balance.
Answer: D

15) A document sent to each customer showing his or her beginning accounts receivable
balance and the amount and date of each sale, cash payment received, any debit or credit
memo issued, and the ending balance is the
A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.
Answer: B

16) The document that accompanies the customer's payment is the

A) credit memo.
B) remittance advice.
C) vendor invoice.
D) monthly statement.
Answer: B

17) A ________ indicates a reduction in the amount due from a customer because of
returned goods or an allowance.
A) bill of lading
B) sales invoice
C) credit memo
D) monthly statement
Answer: C
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18) A ________ is a list prepared when cash is received by someone who has no
responsibility for recording sales, accounts receivable, or cash, and who has no access to
the accounting records.
A) prelisting of cash receipts
B) sales invoice
C) packing ticket
D) vendor invoice
Answer: A

19) When dealing with the processing and recording of cash receipts,
A) the most important concern is the theft of cash.
B) theft can only occur before the receipts are entered into the records.
C) cash receipts should be deposited at least monthly.
D) the monthly statement is used to prepare the cash receipts journal.
Answer: A

20) Which of the following is a business function related to sales returns and allowances?
A) processing customer orders
B) writing off uncollectible accounts
C) processing and recording credit memos
D) granting credit
Answer: C

21) For a firm that practices good internal controls in the sales and collections cycle, the
function of indicating credit approval should be recorded on which of the following
documents?
A) sales order
B) sales invoice
C) customer order
D) remittance advice
Answer: A

22) When posting items sold on account from the sales journal
A)
Details of the journal are posted to Journal totals are posted to
The sales account The general ledger

B)
Details of the journal are posted to Journal totals are posted to
The sales account The accounts receivable subsidiary
ledger

C)
Details of the journal are posted to Journal totals are posted to
The accounts receivable master file The general ledger

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D)
Details of the journal are posted to Journal totals are posted to
The accounts receivable account in the The sales account in the general ledger
general ledger

Answer: C

23) Which document or record is used in the write-off of uncollectible accounts classes of
transactions?
A) general journal
B) remittance advice
C) sales transaction file
D) sales order
Answer: A

24) Who is generally responsible for opening receipts when a company uses a lockbox to
speed the handling of cash receipts?
A) company personnel
B) temporary employees in the town where the lockbox is located
C) bank employees
D) company controller
Answer: C

25) Which of the following is a correct statement regarding the shipment of goods?
A) The shipping document must be in paper form.
B) The shipping document is used to update the perpetual inventory records.
C) Only one copy of the shipping document is needed.
D) All of the above are correct statements.
Answer: B

26) Which accounts are involved in the sales class of transactions?

A) accounts receivable and sales returns and allowances
B) cash and allowance for uncollectible accounts
C) sales allowances and accounts receivable
D) accounts receivable and sales
Answer: D

27) Match seven of the terms for documents and records (a-k) with the descriptions
provided below (1-7).
a. customer order form
b. sales order
c. bill of lading
d. sales invoice
e. summary sales report
f. accounts receivable master file
g. monthly statement

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h. remittance advice
i. prelisting of cash receipts
j. credit memo
k. uncollectible account authorization form

prelisting of cash receipts ________ 1. A list prepared when cash is received by someone who
has no responsibility for recording sales, accounts receivable, or cash, and has no access to the
accounting records. It is used to verify whether cash received was recorded and deposited at the
correct amounts and on a timely basis.

credit memo ________ 2. A document indicating a reduction in the amount due from a customer
because of returned goods or an allowance.

bill of lading ________ 3. A document prepared to initiate shipment of goods, indicating the
description of the merchandise, the quantity shipped, and other relevant data. It is a written
contract between the carrier and seller of the receipt and shipment of goods.

sales order _______ 4. A document for communicating the description, quantity, and related
information for goods ordered by a customer. This is frequently used to indicate credit approval
and authorization for shipment.

remittance advice ________ 5. A document mailed to the customer and typically returned to the
seller with the cash payment.

uncollectible account authorization form ________ 6. A document used internally to indicate

authority to write-off an account receivable as uncollectible.

sales invoice ________ 7. A document or electronic record indicating the description and
quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.

28) When designing audit procedures, tracing of source documents to the customers
subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?
A) valuation
B) cutoff
C) completeness
D) classification
Answer: C

29) When assessing risk control, the auditor must do all of the following except
A) assess control risk for each objective by evaluating the controls and deficiencies for each
objective.
B) perform the detailed test of balances.
C) identify the key internal controls and deficiencies.
D) associate the key controls and deficiencies with the objectives.
Answer: B

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30) When sales invoices are automatically calculated and posted by a computer, the auditor
may be able to reduce substantive tests of transactions for which, if any, assertion?
A) accuracy
B) existence
C) completeness
D) none of the above
Answer: A

31) In many audits, no substantive tests of transactions are made for the ________
assertion on the grounds that understatement of sales is not a concern.
A) accuracy
B) existence
C) completeness
D) none of the above
Answer: C

32) Which one the following procedures performed for the billing function provides
evidence for the completeness assertion?
A) making sure that all shipments have been billed
B) making sure that no shipment has been billed more than twice
C) making sure that each shipment is billed at the correct amount
D) making sure that each shipment is billed to the proper customer
Answer: A

33) Which of the following is an accurate statement relating to separation of duties?

A) Management should deny cash access to anyone responsible for entering sales and cash
receipts transaction information into the computer.
B) All disagreements on the monthly statements should be directed to a designated person who
has no responsibility for handling cash or recording sales or accounts receivable.
C) The credit granting function should be separate from the sales function.
D) All of the above are accurate statements.
Answer: D

34) Which of the following is not a key control for sales and cash receipts?
A) active board of directors
B) adequate separation of duties
C) internal verification procedures
D) adequate documents and records
Answer: A

35) Which one of the following statements is true? In deciding on substantive tests of
transactions,
A) some procedures are commonly employed on every audit regardless of the circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the tests of
controls.
C) results obtained in the prior year's audit will not affect the procedures used this year.
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D) the materiality of the item will not influence the choice of procedures used.
Answer: A

36) To test for recorded sales for which there were no actual shipments, the auditor
vouches from the
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

37) An effective procedure to test for unfilled shipments is to trace from the
A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.
Answer: B

38) The auditor traces items from the source documents to the journals in order to
accumulate audit evidence that will satisfy the
A) existence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.
Answer: B

39) In many audits of sales transactions substantive tests of transactions can be reduced in
determining the completeness objective because
A) understatements of assets and income are a greater concern than overstatements.
B) overstatements of assets and income are a greater concern than understatements.
C) it doesn't matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two
financial statements will not be misleading.
Answer: B

40) To determine that sales are accurately recorded, the unit prices on the duplicate sales
invoices are normally compared with
A) the original invoices.
B) an approved master price list.
C) the amounts recorded in the sales journal for that transaction.
D) the amounts posted to the customer's account in the accounts receivable master file.
Answer: B

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41) Prenumbered documents are intended to help
A)
Prevent the failure to bill or Prevent duplicate billings or
record sales recordings of sales
Yes Yes

B)
Prevent the failure to bill or Prevent duplicate billings or
record sales recordings of sales
No No

C)
Prevent the failure to bill or Prevent duplicate billings or
record sales recordings of sales
Yes No

D)
Prevent the failure to bill or Prevent duplicate billings or
record sales recordings of sales
No Yes

Answer: A

42) Prenumbered documents will only be useful for control purposes if

A) a different numerical sequence is used for each company.
B) the sequence is accounted for periodically.
C) employees are allowed to use documents out of numerical sequence.
D) the same numerical sequence is used each accounting period.
Answer: B

43) ________ tests are for omitted transactions, while ________ tests are for nonexistent
transactions.
A) Tracing; vouching
B) Vouching; tracing
C) Verifying; tracking
D) Tracking; verifying
Answer: A

44) Which one of the following best describes the auditor's responsibilities regarding
appropriate authorizations in the sales/collections cycle?
A) Credit must be authorized before the sale.
B) Goods must be shipped after the authorization.
C) Prices must be authorized.
D) All of the above should be of concern to the auditor.
Answer: D

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45) Which type of misstatement is always a fraud?
A) sales included in the journals for which no shipment was made
B) sales to related parties, such as officers and subsidiaries
C) shipments made to nonexistent customers and recorded as sales
D) sales recorded more than once
Answer: C

46) Which of the following is the appropriate point at which the auditor deems
authorization to be critical?
A)
Credit granting Price authorization Shipment of goods
Yes Yes Yes

B)
Credit granting Price authorization Shipment of goods
Yes No Yes

C)
Credit granting Price authorization Shipment of goods
No Yes No

D)
Credit granting Price authorization Shipment of goods
Yes No No

Answer: A

47) Which of the following would least concern an auditor regarding the lack of a specific
authorization to conduct the sales transaction?
A) granting of credit
B) shipment of goods
C) determination of discounts
D) selling of goods for cash
Answer: D

48) As a test of control, the auditor examines sales invoices for supporting documents. The
relevant transaction-related audit objective is
A) accuracy.
B) occurrence.
C) classification.
D) timing.
Answer: A

49) The accurate recording of sales transactions concerns all of the following except for
A) proper credit authorization.
B) shipping the amount of goods ordered.
C) accurately billing for the amount of goods shipped.
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D) accurately recording the amount billed in the accounting records.
Answer: A

50) Except for two key differences, the transaction-related audit objectives are essentially
the same for the processing of credit memos as they are for sales. Which of the following
are the two key differences?
A) risk and emphasis on the completeness objective
B) materiality and emphasis on the accuracy objective
C) risk and emphasis on the classification objective
D) materiality and emphasis on the occurrence objective
Answer: D

51) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a
customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit
memos to his friend for goods supposedly returned. The most effective procedure for
preventing this activity is to
A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all
credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.
Answer: B

52) When an employee who is authorized to make customer entries in the accounts
receivable subsidiary ledger purposefully enters cash received into the wrong customer's
account, that employee may be suspected of
A) kiting.
B) lapping.
C) floating.
D) shorting.
Answer: B

53) An audit procedure that compares the name, amount, and dates shown on remittance
advices with cash receipts journal entries and with related duplicate deposit slips would be
effective in detecting
A) kiting.
B) lapping.
C) unauthorized write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.
Answer: B

54) Which of the following tests of controls is useful to test the transaction-related audit
objective of posting and summarization?
A) Observe whether monthly statements are sent.
B) Observe unrecorded cash at a point in time.
C) Observe whether the accountant reconciles the bank account.
D) Observe endorsement of incoming checks.
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55) The audit procedure referred to as proof of cash receipts is particularly useful to test
A) time lags in making deposits.
B) whether all recorded cash receipts have been deposited in the bank.
C) whether there are cash receipts that have not been recorded in the journals.
D) the client's reconciliation between cash receipts and bank deposits.
Answer: B

56) When designing tests of controls and substantive tests of transactions for cash receipts,
it is important to remember that
A) the test of controls are designed to test for monetary misstatements.
B) auditors use the same methodology for designing tests of controls and substantive tests of
transactions for cash receipts as they use for sales.
C) the tests of controls are not dependent on the controls the auditor identifies.
D) the tests of controls are not dependent on whether the company being audited is publicly
traded.
Answer: B

57) Which of the following would offer the best protection for a company that wishes to
prevent a reoccurrence of a previously detected "lapping" problem with trade accounts
receivable?
A) Separate duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
B) Separate duties so that no employee has access to both checks from customers and currency
from daily cash receipts.
C) Have a mandatory vacation policy for employees who both handle cash and enter cash
receipts into the system.
D) Request that customer's payment checks be made payable to the company and addressed to
the treasurer.
Answer: C

58) The most difficult type of cash embezzlement for auditors to detect is when it occurs
A) after the merchandise has been shipped.
B) before the merchandise has been shipped.
C) before the cash is recorded in the cash receipts journal or other cash listing.
D) after the cash is recorded in the cash receipts journal or other cash listing.
Answer: C

59) The auditor's primary concern in performing audit procedures of the write-off of
uncollectible accounts relates to the risk that the client writes off customer accounts that
have already been collected. The primary control for preventing this fraud is
A) examining authorized credit memos.
B) examining the uncollectible account authorization form.
C) examining debit memos.
D) examining the vouchers payable register.
Answer: B

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60) Realizable value is an essential balance-related audit objective for accounts receivable
because collectibility of receivables is often a significant concern. Which of the following is
not an internal control the auditor should evaluate to reduce the likelihood of uncollectible
accounts?
A) customer credit approval by appropriate personnel
B) preparation of an aged trial balance reviewed and followed up by appropriate management
personnel
C) a written policy of writing off uncollectable receivables
D) All of the above are internal controls the auditor should evaluate.
Answer: D

62) The most significant effect of the results of the tests of controls and substantive tests of
transactions in the sales and collection cycle is on
A) bad debt expense.
B) the analytical tests to be performed.
C) the confirmation of accounts receivable.
D) the impact of processing cash receipts.
Answer: C

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