1.There are __________ classes of transactions in the sales and collection cycle.

Answer: Five

2. The decisions and processes necessary for the transfer of the ownership of goods and services to the
customers after they are made available for sale refers to the:
Answer: Sales and collection cycle

3. A ___________ system is when customers make payments directly to an address maintained by a

bank.
Answer: Lockbox

4. Proper authorization for sales includes:

Answer: All of the above

5. Which of the following is an example of a control for the audit objective that deals with recording
sales correctly for the amount of goods shipped?
Answer: Periodic statements sent to customers

6. Vouching refers to moving from the journals back to the source documents, which is a test for:
Answer: Occurrence

7. Which of the following is an example of a control for the audit objective that deals with making sure
the cash receipts are deposited and recorded at the amount received?
Answer: Independent bank reconciliation

8. ______________ test is a useful procedure to determine whether all recorded cash receipts have
been deposited in the bank account.
Answer: Proof of cash receipts

9. Periodic aging of accounts receivable is a control to reduce:

Answer: Un-collectable accounts

10. The testing of controls and substantive tests of transactions in the sales and collection cycle affects
the:
Answer: Confirmation of accounts receivable
Which of the following procedures would ordinarily be best expected to find unrecorded sales?
a. Compare shipping documents with sales records.
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
ANSWER: Compare shipping documents with sales records.

Prenumbered documents will only be useful for control purposes if:

a. a different numerical sequence is used for each company.
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.
ANSWER: the sequence is accounted for periodically

An effective procedure to test for unbilled shipments is to trace from the:

a. sales journal to the shipping documents.
b. shipping documents to the sales journal.
c. sales journal to the accounts receivable ledger.
d. sales journal to the general ledger sales account.
ANSWER: shipping documents to the sales journal

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.
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 years audit will not affect the procedures used this year.
d. the materiality of the item will not influence the choice of procedures used.
ANSWER: some procedures are commonly employed on every audit regardless of the circumstances

Managements assertions for sales and collection activities are _____ when sales are generated via e
commerce activities.
a. unchanged
b. expanded
c. mitigated
d. decreased
ANSWER: Unchanged

For most firms, the function of indicating credit approval is recorded on the:
a. sales order.
b. sales invoice.
c. customer order.
d. remittance advice
ANSWER: Sales Order

T/F
Credit should be approved before goods are shipped to a customer
ANSWER: True
T/F
The preparation of a sales invoice is the final step in the sales and collection cycle.
ANSWER: False

T/F
For good internal control, the creditgranting function should be separate from the sales function
ANSWER: True

T/F
The prelisting of cash receipts should be prepared by the individual who has primary responsibility for
the recording of cash receipts
ANSWER: False

T/F
Managements assertions for sales and collection activities remain the same whether sales are
generated through traditional or ecommerce activities
ANSWER: True

A schedule prepared by an independent person when cash is received. It is used to verify whether cash
received was recorded and deposited at the correct amounts and on a timely basis.
g. Monthly statement
h. Remittance advice
i. Prelisting of cash receipts
j. Credit memo
ANSWER: Prelisting of cash receipts

A document indicating a reduction in the amount due from a customer because of returned goods or an
allowance granted.
g. Monthly statement
h. Remittance advice
i. Prelisting of cash receipts
j. Credit memo
ANSWER: Credit memo

A document prepared to initiate shipment of goods, indicating the description of the merchandise, the
quantity shipped, and other relevant data. It is a written contract between the carrier and seller of the
receipt and shipment of goods
a. Customer order form
b. Sales order
c. Bill of lading
d. Sales invoice
ANSWER: Bill of lading
An internal document for communicating the description, quantity, and related information for goods
ordered by a customer. This is frequently used to indicate credit approval and authorization for
shipment
a. Customer order form
b. Sales order
c. Bill of lading
d. Sales invoice
ANSWER: Sales order

A document that accompanies the sales invoice mailed to the customer and which can be returned to
the seller with the cash payment
g. Monthly statement
h. Remittance advice
i. Prelisting of cash receipts
j. Credit memo
ANSWER: Remittance advice

A document used internally to indicate authority to writeoff an account receivable as uncollectible.

h. Remittance advice
i. Prelisting of cash receipts
j. Credit memo
k. Uncollectible account authorization form
ANSWER: Uncollectible account authorization form

A document indicating the description and quantity of goods sold, the price, freight charges, insurance,
terms, and other relevant data
a. Customer order form
b. Sales order
c. Bill of lading
d. Sales invoice
ANSWER: Sales invoice

There are __________ classes of transactions in the sales and collection cycle.
a.3
b.4
c.2
d.5
ANSWER: 5

The decisions and processes necessary for the transfer of the ownership of goods and services to the
customers after they are made available for sale refers to the:
a. Payroll and Personnel cycle
b. Acquisition and payment cycle
c. Inventory and warehousing cycle
d. Sales and collection cycle
ANSWER: Sales and collection cycle
A ___________ system is when customers make payments directly to an address maintained by a bank.
Control
Regulated
Lockbox
Depository
ANSWER: Lock Box

Proper authorization for sales includes:

Approval before shipping
Credit terms approval
Credit approval
All of the above
ANSWER: All of the Above
Approval before shipping
Credit terms approval
Credit approval

Which of the following is an example of a control for the audit objective that deals with recording sales
correctly for the amount of goods shipped?
a. Reconciliation of accounts receivable master file with general ledger.
b. Authorized shipping documents
c. Prenumbered shipping documents
d. Periodic statements sent to customers
ANSWER: Periodic statements sent to customers

Vouching refers to moving from the journals back to the source documents, which is a test for:
a. Occurrence
b. Ordering
c. Completeness
d. All of the above
ANSWER: Occurrence

Which of the following is an example of a control for the audit objective that deals with making sure the
cash receipts are deposited and recorded at the amount received?
a. Comparison of cash receipt totals to a summary report
b. Independent bank reconciliation
c. Recording cash on a daily basis
d. Restrictively endorsed check
ANSWER: Independent bank reconciliation

______________ test is a useful procedure to determine whether all recorded cash receipts have been
deposited in the bank account.
a. Proof of cash receipts
b. Proof of sales receipts
c. Proof of book expense
d. Proof of collections
ANSWER: Proof of cash receipts
Periodic aging of accounts receivable is a control to reduce:
a. Theft of fixed assets
b. Sales returns and allowances
c. Uncollectable accounts
d. Theft of inventory
ANSWER: Uncollectable accounts

The testing of controls and substantive tests of transactions in the sales and collection cycle affects the:
a. Confirmation of longterm debt
b. Confirmation of accounts receivable
c. Confirmation of accounts payable
d. Confirmation of fixed assets
ANSWER: Confirmation of accounts receivable

T/F
Estimation of bad debt expenses should be considered during the audit of sales.
ANSWER: True

T/F
A sales invoice is a document sent by mail or electronically to each customer indicating the beginning
balance of their accounts receivable.
ANSWER: False

T/F
A company should expect to collect 100% of their sales.
ANSWER: False

T/F
An example of internal controls for sales is prenumbered documents.
ANSWER: True

T/F
If an auditor discovers shipments to nonexistent customers that are recorded as sales, this is an
example of an error.
ANSWER: False

T/F
An audit program should always be performed exactly as the audit program was designed.
ANSWER: False

T/F
Deferring cash receipts of one customer to cover shortages of another customer is an example of
lapping of accounts receivable.
ANSWER: True
T/F
Making sure that customer's checks are restrictively endorsed is an internal control to safe guard cash
received.
ANSWER: True

T/F
A company's accountant should perform regular reconciles of the company's bank accounts.
ANSWER: True

T/F
Inherent risk is usually set high by an auditor for the realizable value of accounts receivable objectives.
ANSWER: True

When a customer fails to include a remittance advice with a payment, it is common for the person
opening the mail to prepare one. Consequently the mail should be opened by which of the following
employees?
a. Credit manager
b. Sales manager
c. AR clerk
d. receptionist
ANSWER: receptionist

A key internal control in the sales and collection cycle is the separation of duties between cash handling
and record keeping. The objective most directly associated with this control is to verify that?
a. cash receipts recorded in the cash receipts journal are reasonable
b. cash receipts are correctly classified
c. recorded cash receipts result from a legitimate transaction
d. existing cash receipts are recorded
ANSWER: existing cash receipts are recorded

Company personnel account for the sequence of shipping documents and verify that an entry for each
shipment is included in the sales journal. This control relates most directly to the sales transaction
related audit objective
a. occurrence
b. accuracy
c. completeness
d. timing
ANSWER: completeness

Prevent the misstatement

A manufacturing company received a substantial sales return in the last month of the year, but the
credit memo for the return was not prepared until after the auditors completed their testing. The
returned merchandise was included in the physical inventory.
a. aged trial balance of accounts receivable is prepared.
b. credit memos are prenumbered and all numbers are accounted for
c. a reconciliation of the trial balance of the customers' accounts with the general ledger control is
prepared periodically
d. receiving reports are prepared for all materials received and such reports accounted for on a regular
basis.
ANSWER: receiving reports are prepared for all materials received and such reports accounted for on a
regular basis.

Prevent misstatements
Which of the following controls most likely will be effective in offsetting the tendency of sales personnel
to maximize sales volume at the expense of high debt writeoff's?
a. employees responsible for authorizing sales and bad debt writeoff are denied access to cash.
b. shipping documents and sales invoices are matched by an employee who does not have the authority
to write off bad debt
c. Employees involved in the credit granting function are separated from the sales function
d. Subsidiary a/r records are reconciled to the control account by an employee independent of the
authorization of credit
ANSWER: Employees involved in the credit granting function are separated from the sales function

Prevent the misstatement

A sales invoice for $5,200 was computed correctly, but by mistake, was keyentered as $2,500 to the
sales journal and to the A/R master file. The customer remitted only $2,500, the amount on his monthly
statement.
a. prelisting and predetermined totals are used to control postings
b. sales invoices, numbers, prices, discounts, extensions, and footings are independently checked.
c. the customers' monthly statement are verified and mailed by a responsible person other than the
bookkeeper who prepared them.
d. Unauthorized remittance deductions made by customers or other matters in the dispute are
investigated promptly by a person independent of the A/R function
ANSWER: Prelistings and predetermined totals are used to control postings

Prevent Misstatements
Copies of sales invoices show different unit prices for apparently identical items.
a. all sales invoices are checked as to all details ofter their preparation.
b. differences reported by customers are satisfactorily investigated.
c. statistical sales data are compiled and reconciled with recorded sales
d. All sales invoices are compared with the customers' purchase orders
ANSWER: All sales invoices are checked as to all details after their preparation

An auditor is preforming substantive test of transactions for sales. One step is to trace a sample of debit
entries from the a/r master file back to the supporting duplicate sales invoices. What will the auditor
intend to establish by this step?
a. sales invoices represent existing sales
b. all sales have been recorded
c. all sales invoices have been correctly posted to customer accounts
d. debit entries in the a/r master file are correctly supported by the sales invoices
ANSWER: debit entries in the a/r master file are correctly supported by the sales invoices

To verify that all sales transactions have been recorded, a substantive test of transactions should be
completed on a representative sample drawn from
a. entries in the sale journal
b. the billing clerks' file of sales orders
c. a file of duplicate copies of sales invoices for which all prenumbered forms in the series have been
accounted for
d. the shipping clerk's file of duplicate copies of bills of lading
ANSWER: the shipping clerk's file of duplicate copies of bills of lading

Which audit procedure is most effective in testing credit sales for overstatement?
a. trace a sample of postings from the sales journal to the sales account in the general ledger.
b. vouch a sample of recorded sales from the sales journal to the shipping documents
c. prepare an aging of A/R
d. Trace a sample of initial sales orders to the sales recorded in the sales journal
ANSWER: vouch a sample of recorded sales from the sales journal to the shipping documents