Learning Objective 14-4 1) Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences. Which of the following are two key differences? A) Risk and emphasis on the completeness objective. B) Materiality and emphasis on the accuracy objective. C) Risk and emphasis on the classification objective. D) Materiality and emphasis on the occurrence objective. 2) The transaction-related audit objectives and the client’s methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor’s perspective? 3) When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence. A) True B) False 4) Sales returns and allowances are often ignored by auditors because they are often immaterial. A) True B) False 5) When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective. A) True B) False Learning Objective 14-5 1) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customers account that employee may be suspected of: A) kiting. B) lapping. C) floating. D) shorting. 2) An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting: A) kiting. B) lapping. C) illicit write-offs of customers as uncollectible accounts. D) sales without proper credit authorization. 3) To prevent fraud, management should deny cash access to anyone responsible for: A) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes Yes Yes B) Opening mail from customers Entering sales transactions Entering cash receipts transactions No NoYes Yes C) Opening mail from customers Entering sales transactions Entering cash receipts transactions No Yes Yes D) Opening mail from customers Entering sales transactions Entering cash receipts transactions Yes No No 4) The audit procedure referred to as proof of cash receipts is particularly useful to test: A) time lags in making deposits. B) whether all recorded cash receipts have been deposited in the bank. C) whether there are cash receipts that have not been recorded in the journals. D) the client’s reconciliation between cash receipts and bank deposits. 5) Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for 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. 6) Proper separation of duties is useful to prevent various types of misstatements. Which of the following is not an essential separation of duties? A) Persons having access to cash should also be responsible for recording sales, accounts receivable, and cash. B) Separate the credit-granting function from the sales function. C) Personnel doing internal comparisons should be independent of those entering the original data. D) Anyone responsible for entering sales and cash receipts transactions information into the computer should be denied access to cash. 7) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor? A) Understating the sales journal by not recording cash sales. B) Overstating the accounts receivable control account by intentionally misstating prices charged for goods sold. C) Overstating the accounts receivable subsidiary ledger by not recording payments made by customers. D) Understating the cash receipts journal by purposely recording incorrect amounts. 8) Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected “lapping” problem with trade accounts receivable? A) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. B) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. C) Have customers send payments directly to the company’s depository bank. D) Request that customer’s payment checks be made payable to the company and addressed to the treasurer. 9) Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to: A) deposits in transit. B) collections on the company’s behalf by the bank which are deposited directly to the company’s account. C) cash receipts that were not recorded in the relevant accounting records. D) service charges. 10) When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points.