Revenue Cycle

1. To achieve control when there is not billing department, the billing function should be performed by
the
a. Accounting department . c. Shipping department.
b. Sales department. d. Credit and collection department.

2. The person who opens the main commonly prepares a remittance advice when a customer fails to
return one with a payment. Consequently, mail should be opened by the
a. Credit manager. c. Sales manager.
b. Receptionist. D. Accounts receivable clerk.

3. Which of the following would the auditor consider to be an incompatible operation if the cashier
receives remittance from the mail room?
a. The cashier makes the daily deposit at a local bank.
b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.

4. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregating duties so that accounting has no access to an incoming mail.
b. Segregating duties so that no employee has access both to checks from customers and to
currency from daily cash receipts.
c. Having customers send payments directly to the company’s bank.
d. Requesting that customers’ checks be made payable to the company and be addressed to the
treasurer.

5. Defective merchandise retuned by customers should be presented to

a. Inventory control personnel. c. Purchasing personnel.
b. Sales personnel. d. Receiving personnel.

6. In considering internal control within the revenue/receipt cycle, what is the purpose of a transaction
walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.

7. To determine whether internal control operates effectively to minimize errors of failure to bill a
customer for a shipment, the auditor would select a sample of transactions from the population
represented by the
a. Shipping records file c. Sales invoice
b. Customer order file d. Subsidiary customer accounts ledger

8. The purpose of tests of control over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.

9. The purpose of tests of controls over billing is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.

10. Which of the following control procedure could prevent or detect errors or frauds arising from
shipments made to unauthorized parties?
a. Document policies and procedures for scheduling shipments.
 b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.

11. After making inquiries about credit granting policies, an auditor selects a sample of sales
transactions and examines evidence of credit approval. This test of controls most likely supports
management’s financial statement assertion(s) of:
a. Rights and obligation – Yes; Allocation and valuation – Yes.
b. Rights and obligation – Yes; Allocation and valuation – No.
c. Rights and obligation – No; Allocation and valuation – Yes.
d. Rights and obligation – No; Allocation and valuation – No.

12. An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence
of follow-up on errors reported by the customers. This test of control most likely is performed to
support management’s financial statement assertion of
a. Understandability and classification – Yes; Existence – Yes.
b. Understandability and classification – Yes; Existence – No.
c. Understandability and classification – No; Existence – Yes.
d. Understandability and classification – No; Existence – No.

13. Which of the following fraudulent activities most likely could be perpetrated due to the lack of
effective internal controls in the revenue cycle?
a. Merchandise received is not promptly reconciled to the outstanding purchase order file.
b. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market
value.
c. The write-off of receivable by personnel who receive cash permits the misappropriation of cash.
d. Fictitious transactions are recorded that cause an understatement of revenue and
overstatement of receivables.

14. An auditor who uses a transaction cycle approach to assessing control risk most likely would test
control activities related to transactions involving the sale of goods to customers with the
a. Collection of receivables.
b. Purchase of merchandise inventory.
c. Payment of accounts payable.
d. Sale of long-term debt.

15. In the revenue and collection cycle, of the order of activities listed, which is in the best order of
typical sequence of activities?
a. Credit granting, billing customers, delivering goods, and cash receipts.
b. Customer ordering, delivering goods, billing customer, and cash receipts.
c. Delivering goods, billing customers, credit granting, and collection activities.
d. Customer ordering, delivering goods, credit granting, and collection activities.

16. The customer’s request for merchandise, the customer order, would be in a form of
a. An oral request.
b. A written request on pre-printed form.
c. A written request on customer’s letterhead.
d. Any of the above formats.

17. Sales order forms and its blank forms should be controlled in the
a. Sales manager in the sales department.
b. Credit manager in the credit department.
c. Billing clerk in the accounting department.
d. Sales order section of the sales department.

18. What critical event must take place before goods can be shipped?
a. Credit approval.
b. Receipt of cash.
 c. Determination of correct delivery address.
d. Receipt of purchase order from the customer.

19. To achieve good internal control, which department should perform the activities of matching
shipping documents with sales orders and preparing daily sales summaries?
a. Billing c. Sales Order
b. Credit d. Shipping

20. It is important the sales be billed and recorded in the journal as soon as possible after
a. The order is received.
b. Shipping takes place.
c. The order is received and credit is approved.
d. Credit is approved and it is verified that there is enough inventory to fill the order.

21. When posting to the sales journal, details of a journal are posted to __________ and journal totals
are posted to __________.
a. Sales account; General ledger
b. Accounts receivable master file; General ledger
c. Sales account; Accounts receivable master file
d. Accounts receivable general ledger account; Sales general ledger account

22. When a customer fails to include a remittance advice with a payment, it is a common practice for
the person opening the mail to prepare one. Consequently, mail should be opened by which of the
following employee?
a. Accounts receivable clerk c. Receptionist
b. Credit manager d. Sales manager

23. Which of the following is not an auditor’s concern about a key authorization point in the revenue
and receipts cycle?
a. Prices must be authorized.
b. Goods must be shipped after authorization.
c. Credit must be authorized before the sale.
d. A receiving room must have authorization before releasing items to inventory control.

24. Which of the following controls most likely would be effective in offsetting the tendency of sales
personnel to maximize sales volume at the expense of high bad debts write-offs?
a. Employees involved in the credit granting function are separated from sales function.
b. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
c. Shipping documents and sales invoices are matched by an employee who does not have
authority to write-offs bad debts.
d. Subsidiary accounts receivable records are reconciled to the control account by an employee
independent of the authorization of credit.

25. Which of the following would the auditor’s concern when examining the billing function of the
client?
a. All shipments made have been billed.
b. No shipment has been billed more than once.
c. Each shipment has been billed for the proper amount.
d. All of the above are of concern to the auditor.

26. Which one of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mailroom?
a. The cashier endorses the checks.
b. The cashier prepares the daily deposit.
c. The cashier makes the daily deposit at a local bank.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
27. Internal control over cash receipts is weakened when an employee who receives customer mail
receipts also
a. Maintains a petty cash fund.
b. Prepares initial cash receipts records.
c. Prepares bank deposit slips for all mail receipts.
d. Records credits to individual accounts receivable.

28. The most difficult type of cash defalcation for the auditor to detect is that which occurs
a. In amount under 100.
b. Before the cash is recorded.
c. Out of the balance kept in the cash register.
d. After cash is recorded but before it goes to the bank.

29. An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in
support of management’s financial statement assertion of
a. Completeness. c. Rights and obligations.
b. Existence or occurrence. d. Valuation or allocation.

30. To verify that all sales transactions have been recorded, a test of transactions should be completed
on a representative sample drawn from
a. The shipping documents.
b. Entries in the sales journal.
c. The billing clerk’s file of sales orders.
d. A file of duplicate copies of sales invoices for which all pre-numbered forms in the series have
been accounted for.

31. Which of the following audit procedures would an auditor most likely perform to test control
relating to management’s assertion concerning the completeness of sales transactions?
a. Compare the invoiced prices on sales invoices to the entity’s authorized price list.
b. Inquire about entity’s credit granting policies and the consistent application of credit checks.
c. Inspect the entity’s reports of pre-numbered shipping documents that have not been recorded
in the sales journal.
d. Verify that extensions and footings on the entity’s sales invoices and monthly customer
statements have been recomputed.