SY 2017-2018 ACCT 1126 DRILL # 9_10.28.

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NAME:____________________________________________________
MCQ: Write your answer, in CAPITAL LETTER, on the space provided below. NO ERASURES ALLOWED.

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1. Which of the following processes are included in the revenue cycle?

a. Shipping products to customers. c. Issuance of capital stock.
b. Sending disbursements to suppliers. d. Preparation of a time card.
2. Which of the following is the best example of the control objective in the revenue cycle that all transactions
are recorded accurately?
a. Sales are recorded at the invoice price expected to be collected from customers.
b. Sales orders have sequential numbering.
c. Recorded sales transactions are evidenced by valid invoices and shipping documents.
d. Credits to customer accounts are classified as liabilities.
3. The relationship between the sales cycle and an inventory system can best be noted in which of the following
examples?
a. Credit is established prior to completion of a sales order.
b. Invoices are sent to customers only after shipment is evidenced.
c. Availability of products ordered are verified prior to processing a sale.
d. Billing information is added to the database for new customers.
4. Credit approval policies are implemented by organizations primarily to
a. determine revenue recognition policies. department.
b. ensure customer satisfaction. d. ensure the realization of receivables.
c. prevent lapping by the accounts receivable
5. Sales transactions should be documented at initiation in order to
a. provide the customer a copy of the recording.
transaction. c. offer credit to customers.
b. provide evidence of authorization and d. generate back orders.
6. The significance of the bill of lading is to provide
a. the warehouse personnel with the product that must be shipped to customers.
b. invoices to customers for proper collection.
c. a credit application for customer approval.
d. evidence of title transfer of goods to customers.
7. The risk of material misstatement due to fraud relating to revenue recognition should be
a. approached in a manner that is identical to control risk assessment.
b. given lower priority to the risk of embezzlement.
c. ordinarily presumed by the auditor.
d. assumed to have been considered by the FASB.
8. A method used by companies to fraudulently inflate revenues is the
a. use of hidden side letters giving the customer an irrevocable right to return the
product.
b. recording of fictitious sales.
c. shipment of product not ordered by customers.
d. all of the above.
9. Which of the following evidences delivery of product to customers sufficient for company recording as
revenues?
a. A check received from the customer.
b. An agreement to purchase product signed by the customer.
c. A pick ticket in the warehouse.
d. A bill of lading and tracking number with the shipper.
10. Which of the following must exist prior to the recognition of revenue by a company from the sale of a
product?
a. The cash is realized on the sale of the product.
b. A price is discussed based upon the customer's resale of the product.
c. The customer is given the option to return the product at any time.
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d. The product is adequately delivered to the customer.

11. Fraud related to revenue recognition will most likely be identified by the auditor through the which of the
following independent situations?
a. Sales have increased 5% in the current period over the previous period and is consistent with the results
of competitors.
b. Gross margin is equivalent in the current period to previous periods and is below that of the industry.
c. Sales are higher in the month preceding each quarter end.
d. The sales of a revolutionary new product are increasing beyond that of the competition in the periods
immediately following its introduction.
12. Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing
a. trend analysis. c. reasonableness testing.
b. ratio analysis. d. non-statistical sampling.
13. Hardman and Jennings, LLP, an audit firm, compares bad debt expense of a client in the current period to
bad debt recorded for the past three periods. Hardman and Jennings is performing which type of analysis?
a. trend c. critical
b. ratio d. reasonableness
14. Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores. Lithgow and Harris
relates annual revenue by sales per square feet and sales per customer. What type of analysis is Lithgow and
Harris most likely performing?
a. Ratio analysis. c. Reasonableness tests.
b. Critical analysis d. Non-statistical analysis.
15. In an audit of financial statements, the risk of the high rate of return of products sold includes that of
a. sales that are recorded improperly.
b. an estimate of accrued returns that reduces net income.
c. a reduction of net sales for an increase to the sales returns and allowance account.
d. consignment goods that are returned and forwarded to third parties.
16. The major risk associated with receivables is that
a. they may be sold to a bank with recourse.
b. they may be recorded as long-term when in fact they will be realized in the current
period.
c. they will not be realized for the entire amount due.
d. they are pledged as collateral as disclosed in the footnotes to financial statements.
17. Which of the following is a proper control for the detection of unusual sales transactions recorded in the
general ledger?
a. Electronic authorization prior to posting.
b. Use of sequentially numbered sales documents.
c. Random statements to customers.
d. Review of transactions by upper management or the board.
18. A control that may be implemented to ensure all sales that occur are recorded in the general ledger is the
a. use of prenumbered shipping, invoice and sales documents.
b. use of prenumbered statements, inventory lists and credit memos.
c. reconciliation of invoices with customer statements.
d. use of pre-authorized price lists.
19. The internal audit department at Monument Company receives electronic exceptions reports for all sales
transactions entered over Php 10,000 in total. This process is performed for the purpose of
a. drafting financial statements.
b. monitoring revenue transactions.
c. providing management reports to the controller.
d. providing suggestions for operational improvement.
20. Auditors will examine significant sales returns immediately subsequent to the period under audit in order to
a. substantiate cutoff and the occurrence of net sales transactions.
b. test the sufficiency of cash balances to cover refunds.
c. monitor customer satisfaction for disclosure.
d. assess the nature of procedures that will be performed for the next period's audit.
21. The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful
accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is
to substantiate the assertion of
a. existence of receivables c. valuation of receivables
b. cutoff of receivables d. rights to receivables
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22. What evidence is utilized by the auditor for analytical purposes in substantiating the completeness allowance
for bad debt estimate?
a. Accounts receivable aging schedule c. Confirmations returned without exception.
b. Copies of checks received from customers. d. Stock prices of customer companies.
23. Much of the understanding of revenue transactions for compliance with GAAP can be performed by
a. examining sales contracts and inquiry of management.
b. confirming sales with customers.
c. discussing the transactions with qualified members of the Financial Accounting Standards Board.
d. comparing shipping documents with invoices.
24. The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate the
assertion of
a. cutoff. c. legality.
b. completeness. d. occurrence.
25. In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping
documents shortly before year-end and immediately following the year under audit. The auditors compare the
documents to the sales journal in order to test
a. existence of sales. c. cutoff of sales transactions.
b. presentation and disclosure of receivables. d. completeness of receivables.
26. Completeness of revenues may be tested by the auditor through the selection of a sample of
a. shipping documents and tracing them to the sales journal.
b. accounts receivable and tracing them to cash receipts.
c. recorded sales transactions and tracing them to the general ledger.
d. inventory records and tracing them to the shipping documents.
27. Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of
accounts receivable. This test is performed by Homer and Moe primarily to substantiate the
a. existence of related party transactions. c. obligation of debt.
b. existence of accounts receivable. d. cutoff of the allowance for bad debt.
28. The aged accounts receivable report is utilized by the auditor to
a. encourage the client to collect on receivables that are long past due.
b. select the type of confirmations that will be sent to banks.
c. assess the adequacy of the allowance for doubtful accounts.
d. identify debits in the receivables balance that should be reclassified to payables.
29. According to auditing standards, accounts receivable confirmations are required to be used
a. on every audit engagement. c. if the balance is material.
b. if the client agrees in writing to the d. if environmental risk is low.
procedure.
30. The primary difference between positive and negative confirmations used in the audit of accounts receivable is
a. the mode of response.
b. the amount of information included.
c. the control of the confirmation process by the auditor.
d. the level of assurance provided.
31. For which of the following accounts receivable customer populations would the use of negative confirmations
be most appropriate?
a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the
revenue cycle.
b. A utility company with control risk over the revenue cycle assessed high.
c. A mortgage banking company with excellent control over the purchasing cycle.
d. A cable company with control risk over the revenue cycle assessed low
32. Accounts receivable confirmations usually provide strong evidence about
a. the existence of receivables. receivables.
b. the completeness of receivables. d. the obligations of receivables.
c. the presentation and disclosure of
33. Confirmations that are sent to select customers asking them to review the current balance due the client as
shown on the client's statement and return the letters directly to the auditor indicating whether they agree
with the indicated balance, are known as
a. direct confirmations. c. positive confirmations.
b. indirect confirmations. d. negative confirmations.
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34. Which one of the following procedures would be considered improper by the auditor in the process of
confirming receivables?
a. The auditor allows the client's staff to prepare the confirmation letters after the auditor has chosen the
items to be confirmed.
b. The auditor allows the client to sign the confirmations after they are prepared.
c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the
typing of the letters.
d. The auditor asks the addressee to return the confirmation to the audit firm's office.
35. An auditor's examination of the sales account using a cut-off test would most likely detect
a. kiting. c. lapping of accounts receivable.
b. sales that should be deferred. d. sales recorded in the wrong period.
36. Alternative procedures that would provide evidence of the existence of receivables would include
a. physical observation of customer facilities.
b. review of subsequent collections.
c. analysis of the aged trial balance.
d. a confirmation to the client management for customer accounts.
37. Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable
because
a. confirmations are selected based upon zip codes.
b. a P.O. Box is more reliable than a street address.
c. confirmations should be sent only to business addresses and not residential.
d. the address may be routed to the client for retrieval and fraudulent signing.
38. Unreturned positive confirmations for accounts receivable warrant
a. replacing the sample selection with a new customer.
b. sending second requests and possibly performing subsequent procedures.
c. the projection of larger misstatements to the population.
d. requesting that the client send additional audit correspondence to customers.
39. An example of alternative procedures for the confirmation of accounts receivable includes
a. inquiry of management.
b. tracing source documents to recorded amounts.
c. review of subsequent collections on account by the client.
d. providing an estimate of the allowance for doubtful accounts to be recorded by the
client.
40. A key indicator of fraud in the revenue cycle is the auditor's detection of
a. customer collections that are over 90 days past due.
b. credit entries in customer accounts receivable for authorized writeoffs.
c. recurring entries in the sales journal.
d. altered shipping documents and invoices.