Question

1. Which of the following are FALSE with respect to the audit of the sales/receivable cycle?

A. There is a high inherent risk of overstatement of sales when management compensation is based on sales growth.

B. The volume and complexity of sales are unlikely to have any impact on the inherent risk over the sales cycle.

C. The assertions most at risk for accounts receivable are occurrence, cut-off, and accuracy and valuation.

D. To assist with risk assessment, the auditor should develop an expectation of total revenues by understanding the company’s products, clients, markets, and capacity (maximum sales volume).

E. An understanding of the sales cycle can lead to an understanding of an entity’s expenditure cycles and help in assessing the possibility of misstatements in these areas.

F. Of main concern with sales adjustments is that fictitious sales adjustments are recorded to conceal misappropriations of cash receipts.

G. Analytical procedures are performed at the risk assessment phase to give the auditor evidence about financial statement assertions.

2. From the list of analytical procedures provided, identify which relate to sales and receivables.

List of analytical procedures:

A. Comparing bad debts to sales revenue and total receivables to identify unexplained changes.

B. Expected staff costs based on average pay rate and the average number of staff.

C. Days in accounts payable.

D. Monthly trends in sales levels.

E. Days in accounts receivable.

3. Which of the following are true with respect to cash receipts?

A. At the end of the day, there should be an independent check of the total printed by the register with the amount of cash on hand.

B. Only one person should be responsible for opening the mail.

C. At the end of the day, the cash should be forwarded to the cashier’s department for deposit in the bank, together with the register or terminal printed totals.

D. Nothing needs to be done with respect to credit card sales, because payment from the credit card company is assured.

E. The total printed by the cash register and the validated deposit slip should be sent to general accounting to be entered in the cash receipts journal.

F. An employee not otherwise involved in executing or recording cash transactions should perform periodic bank reconciliations.

G. The cheques are forwarded to the cashier’s department for banking with the related remittance advice.

4. From the list of inherent risks provided, identify which relate to sales and receivables.

List of inherent risks:

A. The complexity of payroll calculations for factory workers whose gross earnings may be based on time and/or productivity, affecting the accuracy of payroll costs.

B. Contentious accounting issues such as whether a cost should be capitalized or expensed.

C. The use of sales adjustment transactions to conceal the theft of cash received from customers.

D. The pressure to overstate cash and accounts receivable to avoid going concern debts.

Answer 1

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