1. The auditor is auditing sales and accounts receivable and notes the following:
(a) The company regularly does not follow its credit policies; rather it routinely overrides the credit policy when divisional management needs to meet its performance goals; and
(b) The sales manager has the ability to override the credit policy for important customers. However, the controls over proper recording of sales transactions are working. Which of the following statements would be correct regarding an integrated audit of sales and receivables?
I. The most relevant assertion regarding receivables to test for this client is the existence assertion.
II. If the amount of credit overridden is such that the likely uncollectible amount is material, the auditor should conclude that the client has a material weakness in internal control.
III. The monitoring aspect of internal control is not working effectively.
a. I and II only
b. II only
c. II and III only
d. I, II, and III
2. Using the descriptive information in Question 6-27, indicate the most appropriate action for the auditor to take regarding the expansion of the substantive tests of sales and receivables:
a. Expand the use of confirmations to determine the existence of the customers with bad credit.
b. Expand the search for new sales made to these same customers after year end.
c. Use generalized audit software to foot the file of receivables to determine that all items have been recorded.
d. Expand the use of collectibility tests, including aging of accounts receivable and reviewing credit scores for a large selection of sales made during the latter part of the year, and update the procedure for estimating the allowance for uncollectible accounts.
3. Which of the following would not be a primary consideration of the auditor in determining whether a deficiency was a significant deficiency or a material weakness?
a. The rate of failure of the control
b. The volume and dollar amount of transactions affected by the control
c. Whether the control is computerized or manual
d. Whether the control deficiency is mitigated by other control elements, e.g., the control environment