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Exam 12: Audit of the Revenue Cycle

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Question 1

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Your audit client is a large retail chain with its own credit card. It has annual sales of about $100 million. On December 31, there were approximately 40 000 open accounts with total receivables of approximately $18.5 million. Very few customer balances exceed $1000. The company's general office maintains the accounts receivable records. The large volume of transactions processed by the company has necessitated extensive segregation of duties and frequent balancing of data during processing. Accordingly, the company's general and system controls are considered to be very good. A complete record of each customer's account is stored on a relational database and includes the following information: Description of field contents Type of account (personal, corporate) Customer account number Customer name and address Credit limit (code for 8 credit levels) Status code (active, inactive, bad debt) Number of transactions this month Current month's charges Current month's payments Total outstanding balance Aged balance over 30 days Aged balance over 60 days Aged balance over 90 days Aged balance over 120 days Year account opened Year last active Total purchases this year to date Total returns this year to date Number of months active Total purchases last year Number of months active last year Source transactions are store purchase invoices, payments, and adjustments. Daily, all the orders are received, entered into the computer, and processed against the customer master file. Each account is updated and automatically analyzed to determine whether the transactions just processed have created a condition that should be brought to the attention of the authorization or collection departments. Exception reports are automatically printed and forwarded to these groups. The company sends monthly statements to customers on a cyclical basis. About 2000 statements are mailed each billing day.As the accounts are updated, the day's transactions are accumulated and added to the starting control figure for each cycle. The new control figures are balanced with the sum of all the individual accounts in the cycle (accumulated as each account is processed). In addition, a detailed transaction and cycle control report is prepared, providing an audit trail in customer account number sequence. Required: Describe the audit procedures you would perform in your year-end audit work for this company's accounts receivable. For each audit test, state the relevant audit assertion(s). Be sure to include different types of tests as necessary (e.g. manual or computer-assisted audit techniques), and clearly identify those tests that can be completed using CAATs.

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Question 2

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Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

A) posting and summarization
B) classification
C) cutoff
D) completeness

E) A) and B)
F) C) and D)

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Question 3

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Which of the following control weaknesses could result in problems with collectability of accounts receivable?

Before goods are shipped on account to a new customer, a properly authorized person must

The information systems audit specialist on your audit team has indicated that the general controls over program changes are inadequate for all application cycles. What impact does this have on your audit of sales invoice processing?

For sales, the occurrence transaction-related audit objective affects the existence balance-related audit objective. For cash receipts, the occurrence transaction-related audit objective affects which balance-related audit objective?

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the accounts receivables'

Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?

A risk of material misstatement in accounts receivable associated with the rights and obligations balance-related audit objective is that "consignment goods are recorded as revenue, overstating both revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

It is common to test sales for proper classification as part of testing for

The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is

As part of audit planning, you have calculated accounts receivable turnover for the last five years and compared it to industry averages. Your client's accounts receivable has decreased by about 1.25 times in the current year, while the industry rate has improved. One possible cause of this lowered accounts receivable turnover is

A communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a

A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period, overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

There are three main types of revenue manipulations. Which of the following revenue manipulations affects the valuation objective?

Certain internal controls satisfy more than one objective. It is desirable to consider

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?

If accounts receivable accounts with credit balances are significant, they should be

Glee Inc. is a manufacturer of musical instruments and its year end is September 30th. Copa Loca, a local music school, purchased some instruments from Glee but was not satisfied with the quality and returned the goods to Glee during the last week of September. Being very busy with year end, Glee received the goods from Copa Loca on September 30th but only processed the returned merchandised and issued a credit note in October. This represents a

Positive accounts receivable confirmations were circularized, and there were many differences where the client stated that the goods had not been received as of the date of the confirmation. In addition to the possibility that the goods were not received by the client, this type of reported difference could be an indication of