Multiple Choice Questions
Select the best answer for each of the following and explain fully the reason for your selection.
a. Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
(1) Restrictions placed on sales by laws and regulations.
(2) Decline in sales due to economic declines.
(3) Decline in sales due to product obsolescence.
(4) Over-recorded sales due to a lack of control over the sales entry function.

b. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
(1) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents.
(2) Compare receivable turnover ratios to industry statistics for reasonableness.
(3) Inquire about receivables pledged under loan agreements.
(4) Assess the allowance for uncollectible accounts for reasonableness.

c. Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?
(1) Inaccurate billing due to a lack of controls.
(2) Lapping of accounts receivable.
(3) Misbilling a client due to a data input error.
(4) Recording sales when the customer is likely to return the goods.

d. Which of the following is an example of misappropriation of assets relating to sales?
(1) Accidentally recording cash that represents a liability as revenue.
(2) Holding the sales journal open to record next year’s sales as having occurred in the current year.
(3) Intentionally recording cash received from a new debt agreement as revenue.
(4) Theft of cash register sales.

e. There is a presumption that auditors will confirm accounts receivable unless the auditors’ assessment of the risk of material misstatement is low.
(1) And accounts receivable are immaterial, or the use of confirmations would be ineffective.
(2) And accounts receivable are composed of large accounts.
(3) And the effectiveness of confirmations is absolutely determined.
(4) Or accounts receivable are from extremely reputable customers.

f. Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?
(1) Collectibility is reasonably assured.
(2) Delivery has occurred or is scheduled to occur in the near future.
(3) Persuasive evidence of an arrangement exists.
(4) The seller’s price to the buyer is fixed or determinable.

g. To determine that all sales have been recorded, the auditors would select a sample of transactions from the:
(1) Shipping documents file.
(2) Sales journal.
(3) Accounts receivable subsidiary ledger.
(4) Remittance advices.

h. Which of the following would most likely be detected by an auditor’s review of the client’s sales cutoff?
(1) Excessive goods returned for credit.
(2) Unrecorded sales discounts.
(3) Lapping of year-end accounts receivable.
(4) Inflated sales for the year.

i. To test the existence assertion for recorded receivables, the auditors would select a sample from the:
(1) Sales orders file.
(2) Customer purchase orders.
(3) Accounts receivable subsidiary ledger.
(4) Shipping documents (bills of lading) file.

j. Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?
(1) Existence or occurrence.
(2) Completeness.
(3) Rights and obligations.
(4) Presentation and disclosure.

k. Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents’ delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:
(1) Send positive confirmation requests.
(2) Send negative confirmation requests.
(3) Examine evidence of subsequent cash receipts.
(4) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

l. Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:
(1) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.
(2) Write-offs must be approved by the accounts receivable department.
(3) Write-offs must be authorized by the shipping department.
(4) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.