Chapter 13

1. Which of the following is not an account affected by the sales and collection cycle?
a. Cash
d b. Accounts receivable
c. Allowance for doubtful accounts
d. Gross margin
2. Which of the following is not one of the five classes of transactions included in the sales and
collection cycle?
d a. Sales returns and allowances
b. Charge-off of uncollectible accounts
c. Bad debt expense
d. Depreciation expense
3. What event initiates a transaction in the sales and collection cycle?
a. Receipt of cash.
d b. Delivery of product to a customer.
c. Identification of a new customer.
d. Customer request for goods.
4. A _________ is a document that indicates a request for merchandise by a customer.
a. sales invoice
c b. vendor invoice
c. customer order
d. sales order
5. A _________ is a document that communicates the description, quantity, and related information
for goods ordered by a customer.
a a. sales order
b. customer order
c. vendor invoice
d. sales invoice
6. What critical event must take place before goods can be shipped?
a. Determination of correct delivery address
b b. Credit approval
c. Receipt of cash
d. Receipt of sales order from the customer
7. Before goods are shipped on account, a properly authorized person must:
a. prepare the sales invoice.
c b. approve the journal entry.
c. approve the customer’s credit.
d. verify that the unit price is accurate.
8. A document prepared to initiate shipment of the goods sold is the:
a. sales order.
b b. bill of lading.
c. sales invoice.
d. customer order.
9. The document used to indicate to the customer the amount of a sale and payment due date is the:

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 a. sales invoice.
a b. bill of lading.
c. purchase order.
d. sales order.
10. At what point in the sales and collection cycle does the company first give up assets?
a. Sales approval
d b. Credit approval
c. Cash collection
d. Shipment of goods
11. Most companies recognize sales revenue when:
a. sales are invoiced.
c b. customer orders are received.
c. goods are shipped.
d. customer orders are approved.
12. Which of the following is not a business function within the “Sales” class of transactions?
a. Processing customer orders.
c b. Granting credit.
c. Processing and recording sales returns and allowances.
d. Shipping goods.
13. The total of the individual account balances in the accounts receivable master file equals the:
a. total sales for the period.
d 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.
14. A listing of amounts owed by customer which shows how long each component part has been due is
the:
d a. trial balance.
b. working trial balance.
c. accounts receivable trial balance.
d. aged accounts receivable trial balance.
15. A document sent to each customer showing his or her beginning accounts receivable balance and
b 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.
16. The document that accompanies the customer’s payment is the:
a. credit memo.
b b. remittance advice.
c. vendor invoice.
d. monthly statement.
17. The document that supports reductions in accounts receivable is the:
a. bill of lading.
c b. sales invoice.
c. credit memo.
d. monthly statement.

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18. A document that initiates shipment of goods and indicates the description of the merchandise, the
quantity shipped, and customer name and address is the:
a a. bill of lading.
b. sales invoice.
c. picking ticket.
d. vendor invoice.
19. When designing audit procedures, the direction of tests is a crucial step in satisfying the:
a. valuation objective.
c b. cutoff objective.
c. completeness objective.
d. classification objective.
20. Which of the following documents is not commonly associated with the “cash receipts” class of
transactions?
b a. Remittance advice.
b. Sales order.
c. Prelisting of cash receipts.
d. Cash receipts journal or listing.
21. The process which postpones entries for the collection of receivables to conceal an existing cash
shortage is referred to as:
b a. kiting.
b. lapping.
c. floating.
d. shorting.
22. 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, objective?
a a. Accuracy
b. Existence
c. Completeness
d. None of the above
23. The ____________ is a contract between a carrier (e.g., a trucking company) and the seller of
goods that dictates the details surrounding the shipment of goods.
a a. bill of lading
b. sales invoice
c. picking ticket
d. remittance advice
24. Some companies have customers send payments directly to an address maintained by a bank. This is
called a(n) _______ system.
c a. direct deposit
b. funds transfer
c. lockbox
d. interbank transfer
25. In many audits, no substantive tests of transactions are made for the ________ objective on the
grounds that understatement of sales is not a concern.
c a. accuracy
b. existence
c. completeness
d. none of the above

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26. The most important aspects of the billing function include all but which of the following?
a. Making sure that all shipments have been billed.
b 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.
27. For the most part, the audit of the sales and collection cycle:
a. cannot be performed until the audit of cash is completed.
c b. must be performed first so that the audit of the other cycles can rely on the data.
c. can be performed independently of the audit of other cycles.
d. must be performed simultaneously with the audit of the purchases and disbursements cycle.
28. An audit procedure that compares the name, amount, and dates shown on remittance advices with
b cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:
a. kiting.
b. lapping.
c. illicit write-offs of customers as uncollectible accounts.
d. sales without proper credit authorization.
29. In which of the following will sales return and allowances not be recorded?
a. Sales returns and allowances transaction file
c b. Accounts receivable master file
c. Cash receipts journal
d. Sales returns and allowances will be recorded in all of the above
30. For most firms, the function of indicating credit approval is recorded on the:
a. sales order.
a b. sales invoice.
c. customer order.
d. remittance advice.
31. The document used as the basis for recording sales transactions and updating the accounts receivable
master file is the:
d a. sales order.
b. bill of lading.
c. sales journal.
d. sales invoice.
33. Credit memos are normally issued for what purpose(s)?
a. To maintain control of returned merchandise.
a b. To assist in the aging of accounts receivable.
c. To reduce customer frustration and sales losses.
d. To inform the customer of the balance due.
34. Proper auditing requires that an account receivable must be charged off by the client when:
a. the customer files for bankruptcy.
d b. the account is at least six months old.
c. a collection agency cannot inspire customer to pay the debt.
d. the client company concludes that an amount is no longer collectible.
35. Who is generally responsible for opening receipts when a company uses a lockbox to speed the
handling of cash receipts?
c a. Company personnel.
b. Temporary employees in the town where the lockbox is located.
c. Bank employees.

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 d. Company controller.
36. A document used to indicate authority to write off an account receivable as uncollectible is the:
a. credit memo.
b b. uncollectible account authorization form.
c. debit memo.
d. voucher.
37. After the auditor has identified the key internal controls and deficiencies and assessed control risk
for a private company, it is appropriate to decide whether:
a a. substantive tests will be reduced sufficiently to justify costs of performing tests of controls.
b. substantive tests will be increased sufficiently to justify costs of performing tests of controls.
c. tests of controls will be increased sufficiently to justify costs of performing substantive tests.
d. tests of controls will be reduced sufficiently to justify costs of performing substantive tests.
38. Management’s assertions for sales and collection activities are _____ when sales are generated via
e-commerce activities.
a a. unchanged
b. expanded
c. mitigated
d. decreased
40. One key internal control to prevent fictitious transactions in the sales and collection cycle is:
a. to include a list of customer numbers in the computer files.
a b. to account for the integrity of the numerical sequence of sales orders.
c. to include the sales price list of all products in the computer files.
d. having bank reconciliations prepared by one who is independent of the treasury function.
42. 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.
a 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.
d. the materiality of the item will not influence the choice of procedures used.
43. To test for recorded sales for which there were no actual shipments, the auditor traces from the:
a. bill of lading to the sales journal.
b b. sales journal to the bill of lading.
c. sales journal to the accounts receivable subsidiary ledger.
d. bill of lading to the supporting customer order and sales order.
44. An effective procedure to test for unbilled shipments is to trace from the:
a. sales journal to the shipping documents.
b b. shipping documents to the sales journal.
c. sales journal to the accounts receivable ledger.
d. sales journal to the general ledger sales account.
45. The auditor traces items from the source documents to the journals to satisfy the:
a. existence objective.
b b. completeness objective.
c. ownership objective.
d. valuation objective.
46. In many audits of sales transactions, no substantive tests of transactions are performed for the
completeness objective because:
b a. understatements of assets and income are a greater concern than overstatements.
b. overstatements of assets and income are a greater concern than understatements.

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 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.

47. To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are
normally compared with:
b a. the original invoices.
b. an approved 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.
50. Prenumbered documents will only be useful for control purposes if:
a. a different numerical sequence is used for each company.
b 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.
51. It is important that sales be billed and recorded in the journal as soon as possible after:
a. the order is received.
d b. the order is received and credit is approved.
c. credit is approved and it is verified that there is enough inventory to fill the order.
d. the shipment takes place.
52. _______ tests for omitted transactions, while _____ tests for nonexistent transactions.
a. Tracing, vouching
a b. Vouching, tracing
c. Verifying, tracking
d. Tracking, verifying
53. The audit procedure referred to as proof of cash receipts is useful to test:
a. time lags in making deposits.
b 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.
54. Which of the following procedures would ordinarily be best expected to find unrecorded sales?
a. Compare shipping documents with sales records.
a b. Apply gross profit rates to inventory disposed of during the period.
c. Trace payments received subsequent to the balance sheet date.
d. Send accounts receivable confirmation requests.
55. At which point in an ordinary sales transaction would a lack of specific authorization be of least concern
to the auditor?
d a. Granting of credit.
b. Shipment of goods.
c. Determination of discounts.
d. Selling of goods for cash.
56. Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a Smith’s customer.
b 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.

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 b. require receiving reports to support all credit memorandums before they are approved.
c. have independent sales and accounts receivable departments.
d. mail monthly statements to customers.
57. Generally, audit evidence gathered from the sales and collection cycle is combined with evidence from
other parts of the audit:
a a. as the evidence accumulation process proceeds.
b. only when all fieldwork processes of the engagement are completed.
c. only after the audit of the sales and collection cycle is concluded.
d. after the conclusion of both the cash cycle and the sales and collection cycle.
58. Proper separation of duties is useful to prevent various types of misstatements. Which of the following
is not an essential separation of duties?
a a. Persons having access to cash should not have access to marketable securities.
b. Separate the credit-granting function from the sales function.
c. Personnel doing internal comparisons should be independent of those entering the original data.
d. Anyone responsible for inputting sales and cash receipts transactions information into the computer
should be denied access to cash.
59. Which one of the following is not an auditor’s concern about a key authorization point in the
sales/collection cycle?
a a. The receiving room must have authorization before releasing items to inventory control.
b. Credit must be authorized before the sale.
c. Goods must be shipped after the authorization.
d. Prices must be authorized.
60. Transaction-related audit objectives are essentially the same for processing credit memos as for sales
with certain differences. Which of the following are two key differences?
d 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.
61. Cash receipts from sales on account have been misappropriated. Which of the following acts would
conceal this defalcation and be least likely to be detected by an auditor?
a a. Understating the sales journal.
b. Overstating the accounts receivable control account.
c. Overstating the accounts receivable subsidiary ledger.
d. Understating the cash receipts journal.

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 Chapter 15
1. 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 are:
a. sales and sales discounts.
b b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.
3. The appropriate evidence to be obtained from tests of details must be decided on a(n):
a. efficiency basis.
c b. effectiveness basis.
c. audit objectives basis.
d. none of the above.
4. Which of the following is not a balance-related audit objective evaluated in the audit of accounts
receivable?
a a. Occurrence
b. Completeness
c. Rights
d. Accuracy
5. Tests of which balance-related audit objective are normally performed first in an audit of the sales
and collection?
d a. Accuracy
b. Completeness
c. Rights
d. Detail tie-in
6. 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.
7. Which of the following types of receivables would not deserve the special attention of the auditor?
d a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.
8. A listing of the balances in the accounts receivable master file at the balance sheet date, by total
balance outstanding and by the amount of time the component parts have been outstanding, is the:
a. customer list.
b. aged trial balance.

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 c. accounts receivable ledger.
d. schedule of accounts receivable.
10. 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 embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.
12. Cutoff misstatements occur:
a. either by error or fraud.
a b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.
13. Generally accepted accounting principles require that material sales returns and allowances be:
a. recorded in the period when the merchandise is returned.
c b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.
14. 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. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.
15. A type of positive confirmation known as a blank confirmation:
a. requests the recipient to fill in the amount of the balance.
a b. is considered less reliable than the regular positive confirmation.
c. generates as high a response rate as the regular positive confirmation form.
d. is used when the auditor is confirming several small balances.
16. For sales, the occurrence transaction-related audit objective affects the ______ balance-related
audit objective.
a a. existence
b. completeness
c. rights
d. detail tie-in
17. For cash receipts, the occurrence transaction-related audit objective affects the ______ balance-
related audit objective.
b a. existence
b. completeness
c. rights
d. detail tie-in
18. Which of the following is likely to be determined first when performing tests of details 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.

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 c. Accounts receivable are owned.
d. Existing accounts receivable are included.
19. Analytical procedures are substantive tests and, if the results of the analytical procedures are
favorable, the auditor 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.
20. The most effective test of details of accounts receivable is the:
a. detail tie-in of the records.
c b. analysis of the allowance for doubtful accounts.
c. confirmation of accounts receivable.
d. examination of sales invoices.
21. Tests of details of balances are directed to:
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.
22. The most important test of details of balances for accounts receivable is:
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.
23. The most important test of details of balances to determine the existence of recorded accounts
receivable is:
d a. tracing details of sales invoices 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.
24. When should auditors not perform alternative procedures in testing the accounts receivable balance?
b a. When customers do not return positive confirmation requests.
b. When customers do not return negative confirmation requests.
c. When confirmations are deemed to be ineffective as an audit procedure.
d. When confirmations are too costly to use.
25. Because of its central role in auditing of accounts receivable, the ______________ is one of the first
items tested.
c a. accounts receivable master file
b. customer file
c. aged trial balance
d. sales register
26. If accounts receivable accounts with credit balances are significant, they should be:
a. written off.
c b. moved to the debit side.
c. reclassified as accounts payable.
d. corrected by making adjusting entries.
27. Most tests of accounts receivable are based on what schedule, file, or listing?

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 a. Sales master file.
b b. Aged accounts receivable trial balance.
c. Accounts receivable master file.
d. Accounts receivable general ledger account.
28. 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.
30. Which of the following audit procedures would not likely detect a client’s decision to pledge or factor
accounts receivable?
c a. 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.
31. When do most companies record sales returns and allowances?
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. During the month after the sale occurs.
33. The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is to:
a. perform extensive detailed testing of cutoff.
b b. evaluate the client’s control procedures around cutoff.
c. confirm a sample of transactions near period end with customers.
d. confirm transaction with customers.
34. A positive confirmation is more reliable evidence than a negative confirmation because:
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 are performed if a response is not received from the debtor.
35. The advantage of using the negative form of confirmations is that:
a. larger sample sizes can be used without increasing the costs above what would have been required
for positive confirmations.
b. a non-response from the customer proves that the balance is correct.
c. follow-up procedures are scheduled automatically.
d. they provide greater reliance.
36. Which of the following procedures do most auditors perform when auditing the allowance for doubtful
accounts?
b a. Send positive confirmations.
b. Inquire of the client’s credit manager.
c. Send negative confirmations.
d. Examine sales invoices.
37. When positive confirmations are used, auditing standards require follow-up procedures for
a 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.

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 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 customer’s purchase order and the duplicate sales invoice to determine that the merchandise
was ordered.
38. Generally accepted accounting principles require that sales returns and allowances be matched with
related sales:
c a. if practical.
b. if required by industry practice.
c. if the amounts are material.
d. any of the above.
39. For which of the following accounts is cutoff least important?
a. Sales
c b. Sales returns and allowances
c. Cash collections
d. Inventory
41. Which of the following most likely would be detected by a review of a client’s sales cutoff?
a. Excessive sales discounts.
b b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end accounts receivable.
42. The positive (as opposed to the negative) form of receivables confirmation is preferred when:
a. internal control surrounding accounts receivable is considered to be effective.
b 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.
43. 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.
45. Confirmation of accounts receivable balances normally provides evidence concerning the:
a. valuation of the balances.
c b. rights of the balances.
c. existence of the balances.
d. completeness of the balances.
46. If the auditor decides not to confirm accounts receivable, the auditor should:
a. always use alternative procedures to audit the accounts receivable.
c b. include copies of customer statements in the audit files.
c. document the reasons for such a decision in the audit files.
d. include copies of customer sales invoices in the audit files.
47. The understatement of sales and accounts receivable is best uncovered by:
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

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 receivable.
48. 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 recorded:
a. before the merchandise was shipped.
b. at the time the merchandise was shipped.
c. several days subsequent to shipment.
d. at a time after the point at which title passed.
49. A procedure to test for a cash receipts cutoff error is:
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.
50. The most reliable evidence from confirmations is obtained when they are sent:
a. as close to the balance sheet date as possible.
a b. at various times throughout the year to different segments 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.
51. Which of the following is the least important consideration in determining the sample size of
confirmations?
a a. The types of confirmations being sent; that is, positive or negative.
b. The results of related analytical procedures.
c. Total annual credit sales.
d. The auditor’s assessment of detection risk.
52. An auditor learns that collections of accounts receivable during the first ten days of January were
d debited to cash and credited to accounts receivable as of December 31. The effect generally will be
to:
a. 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.
53. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should
not also approve:
c a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.
54. For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the
improper cutoff of cash:
c a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the balance sheet or the income statement.
c. affects on the cash and accounts receivable balances on the balance sheet and does not affect
net income.

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 d. rarely occurs given the control consciousness of most entities.
55. Negative confirmations of receivables are less effective than positive confirmations of receivables
because:
b a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that require extensive follow-up.
d. a majority of recipients usually lack the willingness to respond objectively.
56. An auditor would be least likely to use confirmations in connection with the examination of:
a. inventories.
c b. long-term debt.
c. property, plant, and equipment.
d. stockholders’ equity.
57. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed to satisfy the audit objective of:
d a. accuracy.
b. existence.
c. control.
d. completeness.
58. When performing tests of controls and tests of transactions for sales, the auditor generally defines
the population as:
b a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.