CHAPTER 16

Multiple-Choice Questions

1.easy

Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?

a a. Timing.b. Realizable value.c. Completeness.d. Accuracy.

2. The two primary classes of transactions in the sales and collection cycle areeasy a. sales and sales discounts.b b. sales and cash receipts.

c. sales and sales returns.d. sales and accounts receivable.

3.easy

For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?

d a. Timing and realizable value.b. Completeness and existence.c. Existence and accuracy.d. Realizable value and cutoff.

4.easy

Which of the following types of receivables would not deserve the special attention of the auditor?

d a. Accounts with credit balances.b. Accounts that have been outstanding for a long time.c. Receivables from affiliated companies.d. Accounts where no reply was received to a negative confirmation request.

5.easy

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the time the component parts have been outstanding, is the

b a. customer list.b. aged trial balance.c. accounts receivable ledger.d. schedule of accounts receivable.

6.easy

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include

d a. test footing the total column and the columns depicting the aging.b. comparing the total of the trial balance with the general ledger accounts receivable

account.c. tracing a sample of individual balances to supporting documents.d. all of the above.

7.easy

Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which of the following is not one of those controls?

c a. Controls that detect or prevent defalcations.b. Controls over cutoff.c. Controls over inventory acquisitions.d. Controls related to the allowance for doubtful accounts such as credit approval.

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8. Cutoff misstatements occur wheneasyd

a. the auditor mistakenly asks the bank for the end-of-year bank statement instead of the statement which would include the two succeeding weeks.

b. subsequent period transactions are recorded in the current period.c. current period transactions are recorded in the subsequent period.d. both b and c above, but not a.

9. Generally accepted accounting principles require that material sales returns and allowanceseasy a. be recorded in the period when the merchandise is returned.c b. be recorded in the period when the credit memo is issued.

c. be matched with related sales.d. be recorded as a debit to the sales account.

10.easy

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

d a. dunning letter.b. negative confirmation.c. bank confirmation.d. positive confirmation.

11. A type of positive confirmation known as a blank confirmationeasy a. requests the recipient to fill in the amount of the balance.d b. is considered more reliable than the regular positive confirmation.

c. does not generate as high a response rate as the regular positive confirmation form.d. has all of the attributes of a, b, and c above.

12.medium

Which of the audit objectives is performed first when doing the tests of details of balances for accounts receivable?

b a. Recorded accounts receivable exist.b. Accounts receivable in the aged trial balance agree with related master file amounts, and

the total is correctly added and agrees with the general ledger.c. Accounts receivable are owned.d. Existing accounts receivable are included.

13.medium

Which of the following is an incorrect combination of balance-related audit objectives for accounts receivable and transaction-related audit objectives for sales and collections?

c a. Existence – existence.b. Cutoff – timing.c. Realizable value – timing.d. Detail tie-in – posting and summarization.

14.medium

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, they will

a a. reduce the extent of tests of details of balances.b. reduce the extent of tests of controls.c. reduce the tests of transactions.d. reduce all of the other tests.

15. Tests of details of balances are directed tomedium a. balance sheet accounts for all cycles.a b. income statement accounts for all cycles.

c. balance sheet accounts for some cycles and income statement accounts for other cycles.d. all general ledger accounts for all cycles.

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16. The most important test of details of balances for accounts receivable ismedium a. confirmations.a b. recalculation of the aged receivables and uncollectible accounts.

c. tracing credit memos for returned merchandise to receiving room reports.d. tracing from shipping documents to journals to the accounts receivable ledger.

17. Most tests of accounts receivable and the allowance for uncollectible accounts are based onmedium a. the general ledger balance of each account.d b. the results of analytical procedures.

c. the results of confirmations.d. the aged trial balance.

18.medium

The most important test of details of balances to determine the existence of recorded accounts receivable is

d a. tracing sales entries to shipping documents.b. tracing the credits in accounts receivable to bank deposits.c. tracing sales returns entries to credit memos issued and receiving room reports.d. the confirmation of customers’ balances.

19. If accounts receivable accounts with credit balances are significant, they should bemedium a. written off.c b. moved to the debit side.

c. reclassified as accounts payable.d. corrected by making adjusting entries.

20.medium

What audit procedures is generally viewed as the most important test of details of accounts receivable?

b a. Alternative procedures applied to non-confirmed accounts.b. Confirmation of accounts receivable.c. Both a and b are equally important.d. Neither a nor b.

21. Most tests of accounts receivable are based on what schedule, file, or listing?medium a. Sales master file.b b. Aged accounts receivable trial balance.

c. Accounts receivable master file.d. None of the above.

22.mediumc

An auditor discovers that the client records sales returns and allowances in the accounting period in which they occur, under the assumption of approximately equal offsetting errors at the beginning and end of each period.a. This is acceptable.b. This is not acceptable.c. This is acceptable as long as the amounts are not significant.d. This is not acceptable as long as the amounts are not significant.

23.medium

If the client’s internal control for recording sales returns and allowances is evaluated as ineffective,

a a. a larger sample is needed to verify cutoff.b. sampling is not appropriate.c. all sales returns must be traced to supporting documentation.d. all sales returns must be confirmed with the customer.

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24.mediumb

A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31.a. This is a cutoff misstatement.b. This is a timing difference.c. Both a and b.d. Neither a nor b.

25.medium

The balance-related audit objectives for accounts receivable is most effectively addressed using what type of audit procedure?

c a. Confirmation.b. Physical examination.c. Substantive tests of transactions.d. Any of the above.

26.mediumc

This year is the first time that, as a normal practice in client’s business, accounts receivable may be pledged, assigned, factored, or sold at discount. The audit procedure which would not disclose these practices would bea. a review of the minutes of the board of directors’ meetings.b. discussions with the client.c. confirmation of receivables.d. examination of correspondence files.

27.medium

Cutoff misstatements can occur for all but which of the following in the sales and collection cycle?

a a. Cash payments.b. Sales on account.c. Sales returns and allowances.d. Cash receipts.

28.medium

Two major audit procedures which were formally required by the AICPA as a result of the McKesson & Robbins case are

c a. reconciliation of cash and confirmation of receivables.b. reconciliation of cash and physical examination of inventory.c. confirmation of receivables and physical examination of inventory.d. confirmation of receivables and communication with client’s external lawyer.

29. When do most companies record sales returns and allowances?medium a. During the month in which the sale occurs.b b. During the accounting period in which the return occurs.

c. Whenever the customer contacts the company regarding the credit.d. Any of the above is correct.

30. A positive confirmation is more reliable evidence than a negative confirmation becausemedium a. fewer confirmations can be sent out.d b. the auditor has a document which can be used in court.

c. the debtor’s lack of response indicates agreement with the stated balance.d. follow-up procedures can be performed if a response is not received from the debtor.

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31. The advantage of using the negative form of confirmations is thatmediuma

a. larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.

b. customer’s silence proves that the balance is correct.c. follow-up procedures are scheduled automatically.d. it is appropriate in all circumstances.

32.medium

Which one of the following circumstances would indicate that negative confirmations should not be used on this engagement?

a a. A significant portion of the total accounts receivable balance is represented by a small number of accounts with large balances.

b. The internal control over receivables is good.c. The recipients are mostly businesses rather than individuals.d. The auditor is unaware of disputed or inaccurate accounts.

33.medium

Which of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?

d a. Examine credit files for select customers.b. Inquire of the client’s credit manager.c. Review the client’s correspondence files related to select customers.d. All of the above.

34.mediuma

When positive confirmations are used, SAS No. 67 requires follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?a. Send a second confirmation request.b. Examine subsequent cash receipts to determine if the receivable has been paid.c. Examine shipping documents to verify that the merchandise was shipped.d. Examine duplicate sales invoice to determine that the merchandise was ordered.

35.medium

What are the possible disadvantages of evaluating the allowance for doubtful accounts by reviewing individual non-current balances?

c a. Current accounts receivable may be ignored.b. It is difficult to compare results of the current and prior years if such an unstructured

approach is used.c. Both a and b.d. None of the above.

36.medium

Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff?

b a. Excessive sales discounts.b. Unrecorded sales for the year.c. Unauthorized goods returned for credit.d. Lapping of year-end accounts receivable.

37.medium

The use of the positive (as opposed to the negative) form of receivables confirmation is preferred when

b a. internal control surrounding accounts receivable is considered to be effective.b. there is reason to believe that a substantial number of accounts may be in dispute.c. a large number of small balances are involved.d. there is reason to believe a significant portion of the requests will be made.

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38.medium

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

a a. no reply to a positive confirmation request is received.b. no reply to a negative confirmation request is received.c. collectibility of the receivables is in doubt.d. pledging of the receivables is probable.

39.medium

How might the auditor go about determining whether a client has limited rights to accounts receivable?

d a. Review minutes from board of directors meetings.b. Inquiries of the client.c. Review bank confirmations.d. Any of the above may be used for this purpose.

40.medium

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the

c a. collectibility of the balances confirmed.b. ownership of the balances confirmed.c. existence of the balances confirmed.d. internal control over balances confirmed.

41. If the auditor decides to not confirm accounts receivable, the auditor shouldmedium a. always use alternative procedures to audit the accounts receivable.c b. do no more audit work.

c. document the reasons for such a decision in the audit files.d. follow b and c, but not a.

42. The understatement of sales and accounts receivable is best uncovered bychallenging a. confirming receivables.c b. reviewing the aged trial balance.

c. test of transactions for shipments made but not recorded.d. reconciling the accounts receivable general ledger account with the schedule of accounts

receivable.

43.challenging

Which of the following would not be a part of the approach used in determining the reasonableness of cutoff?

d a. Decide on the appropriate criteria for cutoff.b. Evaluate whether the client has established adequate procedures to ensure a reasonable

cutoff.c. Test whether a reasonable cutoff was obtained.d. Review client’s December 31 and January 2 entries for cutoff problems.

44.challenginga

You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recordeda. before the merchandise was shipped.b. at the time the merchandise was shipped.c. several days subsequent to shipment.d. at a time other than the point at which title passed.

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45. It is easy to test for a cash receipts cutoff error bychallenging a. reconciling the bank statement.d b. performing a four-column proof-of-cash.

c. observing the counting of cash at the balance sheet date.d. tracing recorded cash receipts to bank deposits on the bank statement of a different period.

46.challenging

Which of the following statements regarding proper disclosure of accounts receivable is not correct?

d a. Receivables from officers must be segregated from accounts receivable from customers if the amounts are material.

b. Under SEC requirements, it is necessary to disclose sales and assets for different business segments separately.

c. Proper aggregation of general ledger balances in the financial statements also requires combining account balances that are not relevant for external users.

d. All accounts included in the general ledger must be disclosed separately on the financial statements.

47. The primary purpose of accounts receivable confirmation is to satisfy thechallenging a. existence objective.d b. existence and cutoff objectives.

c. accuracy and cutoff objectives.d. existence, accuracy, and cutoff objectives.

48. The most reliable evidence from confirmations is obtained when they are sentchallenging a. as close to the balance sheet date as possible.a b. at various times throughout the year to different sections of the sample, so that the entire

sample is representative of account balances scattered 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.

49.challenging

Which of the following is not an important consideration in determining the sample size of confirmations?

a a. Total annual credit sales.b. Tolerable misstatement.c. The types of confirmations being sent; that is, positive or negative.d. Achieved detection risk from other substantive tests.

50.challenging

The following statements relate to the process of selecting items to include in the confirmation sample. Which of the following is not a true statement?

b a. With most confirmations, some type of stratification is desirable.b. In most audits, the emphasis should be on sampling equally throughout the population.c. It is important that the auditor have complete independence in choosing the accounts to be

confirmed.d. It is important to sample some items from every material stratum of the population.

51.challengingd

The CPA learns that collections of accounts receivable during the first ten days of January were entered as debits to cash and credits to accounts receivable as of December 31. The effect generally will be toa. overstate the current ratio with no effect on working capital at December 31.b. overstate both working capital and the current ratio at December 31.c. overstate working capital with no effect on the current ratio at December 31.d. leave both working capital and the current ratio unchanged at December 31.

52.challenging

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve

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c a. employee overtime wages.b. credit granted to customers.c. write-offs of customer accounts.d. cash disbursements.

53.challengingb

Returns of positive-confirmation requests for accounts receivable were very poor. As an alternative procedure, the auditor decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed the customer name next to each check listed on the deposit slip; hence, he decided that for each customer for which a confirmation was not received that he would add all amounts shown for that customer on each validated deposit slip for the two months following the balance-sheet date. The major fallacy in the auditor’s procedure is thata. checking of subsequent collections is not an accepted alternative auditing procedure for

confirmation of accounts receivable.b. by looking only at the deposit slip the auditor would not know if the payment was for the

receivable at the balance-sheet date or a subsequent transaction.c. the deposit slip would not be received directly by the auditor as a confirmation would be.d. a customer may not have made a payment during the two-month period.

54.challenging

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?

c a. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.

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 a responsible officer after review of credit department recommendations and supporting evidence.

d. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

55.challenging

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to

c a. evaluate internal control over credit sales.b. test the accuracy of recorded charge sales.c. estimate credit losses.d. verify the validity of the recorded receivables.

56.challenging

When auditors use confirmations for the primary purpose of obtaining evidence related to accounts receivable, which balance-related audit objectives are ordinarily satisfied?

d a. Existence, completeness, and timing.b. Existence, timing, and realizable value.c. Realizable value, accuracy, and cutoff.d. Existence, accuracy, and cutoff.

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Essay Questions

57.easy

As a result of the McKesson and Robbins legal case, two major audit procedures are formally required by the AICPA. State these two required procedures.

Answer:The two audit procedures required by the AICPA are the confirmation of accounts receivable and the physical examination of inventory.

58.easy

Describe the differences between positive and negative confirmations. Which type is more reliable?

Answer:A positive confirmation requests the recipient to respond regardless of whether the balance as stated on the confirmation is correct or incorrect. In contrast, a negative confirmation requests the recipient to respond only if the balance as stated on the confirmation is incorrect. Positive confirmations are more reliable because the auditor can perform follow-up procedures if a response is not received from the customer.

59.medium

State the nine specific balance-related audit objectives as applied to accounts receivable.

Answer:The nine specific balance-related audit objectives as applied to accounts receivable are: Accounts receivable in the aged trial balance agree with related master file amounts,

and the total is correctly added and agrees with the general ledger (detail tie-in). Accounts receivable on the aged trial balance exist (existence). Existing accounts receivable are included in the aged trial balance (completeness). Accounts receivable in the trial balance are accurate (accuracy). Accounts receivable on the aged trial balance are properly classified (classification). Transactions in the sales and collection cycle are recorded in the proper period

(cutoff). Accounts receivable is stated at realizable value (realizable value). The client has rights to accounts receivable on the aged trial balance (rights). Accounts in the sales and collection cycle and related information are properly

presented and disclosed (presentation and disclosure).

60.medium

Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) that may be revealed by each analytical procedure.

Answer:Analytical procedures applicable to the audit of the sales and collection cycle, and possible misstatements, include:

ANALYTICAL PROCEDURE POSSIBLE MISSTATEMENT

Compare gross margin percentage with previous years’.

Overstatement or understatement of sales and accounts receivable.

Compare sales by month over time. Overstatement or understatement of sales and accounts receivable.

Compare sales returns and allowances as a percentage of gross sales with previous years’.

Overstatement or understatement of sales returns and allowances and accounts receivable.

Compare individual customer balances Misstatements in accounts receivable and related

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over a stated amount with previous years’. income statement accounts.Compare bad debt expense as a percentage of gross sales with previous years’.

Uncollectible accounts receivable that have not been provided for.

Compare number of days that accounts receivable are outstanding with previous years’.

Overstatement or understatement of allowance for uncollectible accounts and bad debt expense.

Compare aging categories as a percentage of accounts receivable with previous years’.

Overstatement or understatement of allowance for uncollectible accounts and bad debt expense.

Compare allowance for uncollectible accounts as a percentage of accounts receivable with previous years.

Overstatement or understatement of allowance for uncollectible accounts and bad debt expense.

Compare charge-off of uncollectible accounts as a percentage of total accounts receivable with previous years.

Overstatement or understatement of allowance for uncollectible accounts and bad debt expense.

61.medium

A threefold approach is typically followed when determining the reasonableness of cutoff. Briefly describe the threefold approach.Answer:

First, auditors should decide on the appropriate cutoff criteria. Second, they must evaluate whether the client has established adequate procedures to ensure a reasonable cutoff. Finally, auditors must test whether a reasonable cutoff was obtained.

62.medium

Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.

Answer:For any positive confirmation not returned, the auditor can examine the following to verify the existence and accuracy of individual sales transactions making up the ending balance in accounts receivable: Subsequent cash receipts—evidence of the receipt of cash after the confirmation date

includes examining remittance advices and entries in the cash receipts records. Duplicate sales invoices. Shipping documents. Correspondence between the customer and the client.

63.medium

Describe how the auditor tests the classification objective for accounts receivable.

Answer:The classification objective is tested by reviewing the aged trial balance for material receivables from affiliates, officers, directors, or other related parties. If notes receivable or accounts that should not be classified as a current asset are included with the regular accounts, these should also be segregated. Finally, if credit balances in accounts receivable are significant, it is appropriate to reclassify them as accounts payable.

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64.medium

Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.

Answer:When testing the detail tie-in objective for accounts receivable, the total column and the columns depicting the aging on the aged trial balance are footed, and the total is compared to the general ledger. In addition, a sample of individual balances on the aged trial balance should be traced to supporting documents to verify the customer’s name, balance, and proper aging. These tests are ordinarily done before any other tests to assure the auditor that the population being tested agrees with the general ledger and accounts receivable master file.

65.medium

Assuming the client’s internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions.

Answer:Assuming the client’s internal controls are adequate, the auditor can verify proper cutoff of sales transactions by obtaining the shipping document number for the last shipment made at the end of the period and comparing this number with current and subsequent period recorded sales.

66.medium

Describe how the auditor tests the rights objective for accounts receivable.

Answer:The auditor can test the rights objective for accounts receivable through reviewing the client’s minutes, discussions with the client, confirmation with banks, the examination of debt contracts for evidence of accounts receivable pledged as collateral and the examination of correspondence files to determine whether receivables may have been pledged as collateral, assigned to someone else, factored, or sold.

67.medium

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.

Answer:The primary advantage of negative confirmations is that they are less expensive than positive confirmations because there are no second requests and no follow-up of nonresponses. The primary disadvantage of negative confirmations is that they are less reliable than positive confirmations because a nonresponse must be regarded as a correct response, even though the debtor may have ignored the confirmation request.

68.medium

Discuss the circumstances in which it is acceptable to use negative confirmation requests.

Answer:It is acceptable to use negative confirmation requests only when all of the following circumstances are present: Accounts receivable is made up of a large number of small accounts. Combined assessed control risk and inherent risk is low. There is no reason to believe that the recipients of the confirmations are unlikely to

give them consideration.

69. The auditor’s decision regarding the type of accounts receivable confirmation to use involves a

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medium continuum, starting with using no confirmations in some circumstances, to using only negatives, to using both positives and negatives, to using only positives. Discuss the primary factors affecting this decision.

Answer:The primary factors affecting the decision regarding the type of confirmation to use are the materiality of total accounts receivable, the number and size of individual accounts, control risk, inherent risk, the effectiveness of confirmations as audit evidence, and the availability of other audit evidence.

70.medium

Describe each of the following types of confirmations: Positive confirmation Blank confirmation form Invoice confirmation Negative confirmation

Answer: Positive confirmations are communications addressed to a debtor requesting the

recipient to confirm whether the balance as stated on the confirmation is correct or incorrect.

Blank confirmation forms do not state the amount, but requests the recipient to fill in the balance or furnish other information.

Invoice confirmations request a recipient to confirm an individual invoice rather than an entire balance.

Negative confirmations are addressed to debtor, but request responses only if the information is incorrect.

71.challenging

When an auditor uses negative confirmations several factors must be considered. What are those factors?Answer:

The auditor must carefully consider the following: The effectiveness of the client’s internal controls Results of substantive tests of transactions The appropriateness of analytical procedures as evidence on the fairness of accounts

receivable. Whether a large majority of recipients will give careful consideration to the

confirmation.

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Other Objective Answer Format Questions

72.medium

Match five of the terms (a-k) with the definitions provided below (1-5):

a. Accounts receivable balance-related audit objectivesb. Aged trial balancec. Alternative proceduresd. Blank confirmation forme. Cutoff misstatementsf. Evidence planning worksheetg. Negative confirmationh. Positive confirmationi. Realizable value of accounts receivablej. Timing difference in an account receivable confirmationk. Invoice confirmation

c 1. The follow-up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists and is collectible.

h 2. A letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount.

e 3. Misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period.

f 4. A form used to help the auditor decide whether planned detection risk for tests of details of balances should be low, medium, or high for each balance-related audit objective.

g 5. A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance.

73.easya

Tests of details of balances must be designed for each of the balance-related audit objectives.a. Trueb. False

74.easya

Favorable results from analytical procedures reduce the extent to which the auditor needs to test details of balances.a. Trueb. False

75.easya

Tests of detail tie-in are normally conducted first during the audit of the sales and collections cycle.a. Trueb. False

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76.easyb

The criterion used by most merchandising and manufacturing clients for determining when a sale takes place is whether an order for goods has been received from a customer (customer order).a. Trueb. False

77.mediuma

Acceptable audit risk is normally assessed for the financial statements as a whole and is not usually allocated to various accounts or objectives.a. Trueb. False

78.mediuma

Inherent risk for accounts receivable is normally assessed at the objective level, rather than at the account level.a. Trueb. False

79.mediuma

The balance-related audit objectives of realizable value, rights, and presentation and disclosure are not affected by assessed control risk.a. Trueb. False

80.mediumb

Planned detection risk and planned evidence are directly related; that is, as planned detection risk increases, planned audit evidence for tests of details of balances also increases.a. Trueb. False

81.mediumb

Tests of details of balances focus on testing the year-end balances of income statement accounts.a. Trueb. False

82.mediuma

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.a. Trueb. False

83.mediumb

Blank confirmations are considered less reliable than standard positive confirmations.a. Trueb. False

84.mediuma

Negative confirmations are less expensive, and less reliable, than positive confirmations.a. Trueb. False

85.mediumb

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.a. Trueb. False

86.mediuma

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.a. Trueb. False

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87.mediuma

The type of confirmation is a major factor affecting sample size when confirming accounts receivable, with negative confirmations normally requiring a larger sample than positive confirmations.a. Trueb. False

88.mediuma

When sending confirmations during most audits of accounts receivable, the emphasis should be on confirming larger and older accounts.a. Trueb. False

89.mediumb

When a customer disagrees with the amount shown on an account receivable confirmation, the auditor should not ask the client to reconcile the difference.a. Trueb. False

90.challenginga

A high acceptable audit risk will permit a higher planned detection risk than if acceptable audit risk were low.a. Trueb. False

91.challenginga

For most audits, inherent risk for accounts receivable is usually moderate or low except for the realizable value objective and the cut-off objective.a. Trueb. False

92.challenginga

For sales, the existence transaction-relative objective affects the existence balance-related objective for accounts receivable, but for cash receipts, the existence transaction-relative objective affects the completeness balance-related objective for accounts receivable.a. Trueb. False

93.challenginga

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.a. Trueb. False

94.challenginga

For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff.a. Trueb. False

95.challengingb

Confirmations of accounts receivable are useful for evaluating several accounts receivable balance-related audit objectives, including existence, rights, and realizable value.a. Trueb. False

96.challenginga

When a customer does not return an accounts receivable confirmation, it is acceptable, without performing alternative procedures, to assume the amount is 100% overstated when generalizing from the sample to the population.a. Trueb. False

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