Substantive Tests of Receivables

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Which of the following may be considered to be a primary objective
of the auditor in the examination of accounts receivable?

a) Determine approximate time of collectability of receivables. d) Establish validity and collectability of receivables.
b) Determine the relationship of receivables to sales.
c) Determine the reasonableness of the sales figure.
d) Establish validity and collectability of receivables.
Which of the following is not a procedure used by an auditor in the
examination of accounts receivable?

a) Confirmation d) Physical count and inspection

b) Reconciliation
c) Inquiry
d) Physical count and inspection
In determining validity of accounts receivable, which of the follow-
ing would the auditor consider most reliable?

a) Direct telephone communication between auditor and debtor.

b) Confirmation replies received directly from customers. b) Confirmation replies received directly from customers.
c) Credits to accounts receivable from the cash receipts book after
the close of business at year end.
d) Documentary evidence that supports the accounts receivable
balance.
Which of the following forms of evidence represents the most
competent evidence that a receivable actually exists?

a) A positive confirmation a) A positive confirmation

b) A sales invoice
c) A receiving report
d) A bill of-lading
Confirmation, which is a specific type of inquiry, is the process
of obtaining a representation of information or of an existing
condition directly from a third party. Two assertions for which
confirmation of accounts receivable balances provides primary
evidence are
d) Rights and obligations and existence
a) Completeness and valuation
b) Valuation and rights and obligations
c) Existence and completeness
d) Rights and obligations and existence
Which of the following audit objectives is not served by confirming
customers' accounts receivable?

a) Sales and accounts receivable cutoff.

b) Completeness of customers represented in the accounts re-
b) Completeness of customers represented in the accounts re-
ceivable trial balance.
ceivable trial balance.
c) Valuation of accounts receivable as of period end.
d) Existence of customers represented in the accounts receivable
trial balance.
An auditor should perform alternative procedures to substantiate
the existence of accounts receivable when

a) Pledging of the receivables is probable. c) No reply to a positive confirmation request is received.

b) No reply to a negative confirmation request is received.
c) No reply to a positive confirmation request is received.
d) Collectability of the receivables is in doubt.
Which of the following procedures would an auditor most likely
perform for year-end accounts receivable confirmations when the
auditor did not receive replies to second requests?

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a) Review the cash receipts journal for the month prior to
year-end.
b) Inspect the shipping records documenting the merchandise
sold to the debtors. b) Inspect the shipping records documenting the merchandise
c) Intensify the study of internal control concerning the revenue sold to the debtors.
cycle.
d) Increase the assessed level of detection risk for the existence
assertion.
The auditor should use positive confirmation of accounts receiv-
able

a) When internal controls over the receivables process are be-

b) When the possibility of disputes in the accounts is greater than
lieved to be strong.
usual.
b) When the possibility of disputes in the accounts is greater than
usual.
c) For individual account balances that are immaterial in amount.
d) When variables estimation sampling techniques are not used.
The negative form of accounts receivable confirmation request is
particularly useful except when

a) Individual account balances are relatively large.

b) Internal control surrounding accounts receivable is considered a) Individual account balances are relatively large.
to be effective.
c) A large number of small balances are involved.
d) The auditor has reason to believe the persons receiving the
request are likely to give them consideration.
Which of the following statements is correct concerning the use
of negative confirmation requests?

a) Negative confirmation requests are effective when detection

risk is low.
c) Unreturned negative confirmation requests rarely provide sig-
b) Negative confirmation requests are effective when understate-
nificant explicit evidence.
ments of account balances are suspected.
c) Unreturned negative confirmation requests rarely provide sig-
nificant explicit evidence.
d) Unreturned negative confirmation requests indicate that alter-
native procedures are necessary.
An auditor most likely would review an entity's periodic accounting
for the numerical sequence of shipping documents and invoices
to support management's financial statement assertion of
b) Completeness
a) Valuation
b) Completeness
c) Existence or occurrence
d) Rights and obligations
Which of the following procedures would an auditor most likely rely
on to verify management's assertion of completeness?

a) Confirm a sample of recorded receivables by direct communi-

c) Compare a sample of shipping documents to related sales
cation with the debtors.
invoices.
b) Observe the client's distribution of payroll checks.
c) Compare a sample of shipping documents to related sales
invoices.
d) Review standard bank confirmations for indications of kiting.

An auditor is testing sales transactions. One step is to trace a

sample of debit entries from the accounts receivable subsidiary
ledger back to the supporting sales invoices. What would the b) Debit entries in the accounts receivable subsidiary ledger are
auditor intend to establish by this step? properly supported by sales invoices.

a) Sales invoices represent bona fide sales.

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b) Debit entries in the accounts receivable subsidiary ledger are
properly supported by sales invoices.
c) All sales invoices have been recorded.
d) All sales invoices have been properly posted to customer
accounts.
Tracing bills of lading to sales invoices provides evidence that

a) Shipments to customers were recorded as sales.

b) Shipments to customers were invoiced.
b) Shipments to customers were invoiced.
c) Recorded sales were shipped.
d) Invoiced sales were shipped.
When the objective of the auditor is to evaluate the appropriate-
ness of adjustments to sales, the best available evidence would
normally be

a) Documentary evidence obtained by inspecting documents sup-

porting entries to adjustment accounts. a) Documentary evidence obtained by inspecting documents sup-
b) Oral evidence obtained by discussing adjustment-related pro- porting entries to adjustment accounts.
cedures with controller personnel.
c) Analytical evidence obtained by comparing sales adjustments
to gross sales for a period of time.
d) Physical evidence obtained by inspection of goods returned for
credit.
Which source document should an auditor use to verify the correct
sales date for an item sold FOB shipping point?

a) Customer's purchase order c) Carrier's bill of lading

b) Customers payment document
c) Carrier's bill of lading
d) Sales invoice
An auditor would primarily rely upon which type of evidential
matter when evaluating the collectability of accounts receivable?

a) Negative confirmation d) Aged accounts receivable listing

b) Positive confirmation
c) Management's representations
d) Aged accounts receivable listing
An aged trial balance of accounts receivable is usually used by
the auditor to

a) Evaluate the results of compliance tests. b) Evaluate the provision for bad debt expense.
b) Evaluate the provision for bad debt expense.
c) Verify the validity of recorded receivables.
d) Ensure that all accounts are promptly credited.
Which account balance is most likely to be misstated if an aging
of accounts receivable is not performed?

a) Accounts receivable b) Allowance for bad debts

b) Allowance for bad debts
c) Sales revenue
d) Sales returns and allowances
When auditing the allowance for uncollectible accounts, the least
reliance should be placed on which of the following?

a) Ratios that show the past relationship of the allowance to net

c) The credit manager's opinion.
credit sales.
b) Collection experience of the client's collection agency.
c) The credit manager's opinion.
d) The aging of past due accounts.

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Which of the following analytical audit findings would most likely
indicate a possible problem?

a) A material increase in the acid test ratio. c) A material decrease in the receivables turnover.
b) A material increase in inventory turnover.
c) A material decrease in the receivables turnover.
d) A material decrease in days' sales outstanding.
An auditor's preliminary analysis of accounts receivable revealed
the following turnover rates. Which of the following choices is
the most likely cause of the decrease in accounts receivable
turnover?
Year 3 - 4.3
Year 2 - 6.2
c) Liberalization of credit policy.
Year 1 - 7.3

a) Increase in the cash discounts offered.

b) Increase cash sales.
c) Liberalization of credit policy.
d) Shortening of due-date terms.
During a positive confirmation of accounts receivable as of the
end of the reporting period, approximately 95% of the confirma-
tion letters returned, indicated that the customer owed a smaller
balance than the amount for confirmation. This be explained by
the fact that
b) The sales journal was held open after year-end.
a) The sales journal was closed prior to year-end.
b) The sales journal was held open after year-end.
c) There is a large number of unrecorded sales.
d) The cash receipts journal was held open after year-end
The retention of cash receipts without an entry being made in the
books until a subsequent cash receipt is received from which the
cashier pays the preceding amount retained.
a) Lapping
a) Lapping
b) Kiting
c) Cash shorting
d) Misappropriating.
Lapping may most likely be detected by

a) Careful comparison of the detailed entries on remittance lists

a) Careful comparison of the detailed entries on remittance lists
and duplicate deposit slips with the cash receipts book.
and duplicate deposit slips with the cash receipts book.
b) Surprise count of cash on hand.
c) Scrutiny of the cutoff bank balance.
d) A review of sales discounts.
An auditor who wishes to substantiate the gross balance of the
account "Trade Notes Receivable" is considering the advisability
of performing the four procedures listed below. Which pair of
procedures is best suited to this objective?
I. Age the receivables.
II. Confirm the notes with the makers.
III. Inspect the notes.
b) II and III
IV. Trace a sample of postings from the sales journal to the notes
receivable ledger.

a) I and III
b) II and III
c) I and IV
d) II and IV

Which of the following audit procedures provides the best evi-

dence about the collectability of notes receivable?
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a) Examination of cash receipts records to determine promptness

of interest and principal payments.
a) Examination of cash receipts records to determine promptness
b) Reconciliation of the detail of notes receivable and the provision
of interest and principal payments.
for uncollectible amounts to the general ledger control.
c) Confirmation of note receivable balances with the debtors.
d) Examination of notes for appropriate debtors' signatures.
Which of the following statements regarding the audit of nego-
tiable notes receivable is not correct?

a) Materiality of the amount involved is a factor considered when

selecting the accounts to be confirmed.
b) The auditor should confirm all notes receivable as of the end of
b) The auditor should confirm all notes receivable as of the end of
the reporting period.
the reporting period.
c) Physical inspection of a note by the auditor does not provide
conclusive evidence.
d) Notes receivable discounted with recourse need to be con-
firmed.
A logical substantive test for accrued interest receivable would be
to

a) Verify the cost, carrying. value, and market value of notes

receivable.
c) Recalculate interest earned and compare it to the amounts
b) Verify the interest income by a calculation based on the face
received.
amount of notes and the nominal interest rate.
c) Recalculate interest earned and compare it to the amounts
received.
d) Compare the interest income with published interest investment
records.

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