Audit Exam 3 Multiple Choice Questions with Answers

Audit Exam 3 Multiple Choice Questions with Answers Revenues are normally considered to have been earned when a.) All possibility of return has expired. b.) The company has substantially accomplished what it must to ...

Audit Exam 3 Multiple Choice Questions with Answers Revenues are normally considered to have been earned when a.) All possibility of return has expired. b.) The company has substantially accomplished what it must to be entitled to the benefits. c.) The cash is collected. d.) Goods have been shipped. -Ans- b. The company has substantially accomplished what it must to be entitled to the benefits. The earning process is complete at this point. Sales are normally recorded on the date of the a.) Customer purchase order. b.) Bill of lading. c.) Sales invoice. d.) Payment check -Ans- c.) Sales invoice. This is often the same as the bill of lading date. When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a.) Sales journal. b.) Accounts receivable listing. c.) General ledger. d.) Cash receipts listing. -Ans- b.) Accounts receivable listing. This would have the balance for confirming Which of the following accounts is not normally part of the revenue and collection cycle? a.) Sales b.) Accounts Receivable. c.) Cash. d.) Purchases Returns and Allowances -Ans- d.) Purchases Returns and Allowances Even though this involves shipments, it is considered part of the expenditure and disbursement cycle. The control procedure "credit sales approved by credit department" is directed toward which transaction assertion? a.) Existence/Occurrence b.) Completenessc.) Valuation/Accuracy d.) Cutoff -Ans- c.) Valuation/Accuracy Credit approval helps ensure that the sale will be collectible. Which of the following would be the best protection for a company that wishes to prevent the "lapping" of 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 customers send payments directly to the company's depository bank. d.) Request that customer's payment checks be made payable to the company and addressed to the treasurer. -Ans- c.) Have customers send payments directly to the company's depository bank. The cash is not in the same physical place as the empployees; therefore it cannot be stolen. Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a.) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. b.) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. c.) Write-offs must be approved by the cashier who is in a position to know whether the receivables have, in fact, been collected. d.) Write-offs must be authorized by company field sales employees who are in a position to determine customers' financial standing. -Ans- a.) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. Impropriety of write offs can be controlled by the review and approval of someone outside the credit department. Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a.) Unrecorded purchases. b.) Unrecorded sales. c.) Merchandise purchases being charged to selling and general expense. d.) Fictitious sales. -Ans- b.) Unrecorded sales.Less sales revenue and correct amount of cost of goods sold results in less gross profit, therefore the ratio of gross profit to sales will decrease. (Actually, the gross profit numerator will decrease at a greater rate than the sales denominator An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that a.) Sales invoices represent bona fide sales. b.) All sales have been recorded. c.) All sales invoices have been properly posted to customer accounts. d.) Entries in the accounts receivable subsidiary ledger were properly invoiced. -Ans- d.) Entries in the accounts receivable subsidiary ledger were properly invoiced. Vouching is used to establish support for recorded amounts. An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about a.) Unrecorded costs. b.) Improper credit approvals. c.) Improper sales cutoff. d.) Fictitious sales. -Ans- d.) Fictitious sales. Fictitious sales would increase sales. Because no actual product was shipped, COGS as a percent of sales would decrease. The most likely debit for fictitious sales is accounts receivable, causing accounts receivable to increase. An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent