1. Which of the following statements is true regarding assertions in the revenue cycle?
a. It is typical that all five assertions for revenue are equally important.
b. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion.
c. Audit evidence about the existence of revenues is also appropriate evidence about the valuation of receivables.
d. The allowance for doubtful accounts has important implications for the ownership assertion of accounts receivable.
2. Which of the following statements is true regarding the processing and recording of revenue transactions?
a. The accurate recording of revenue transactions is important for preparing financial statements, but not important for the client's management decisions.
b. Invoices should be prepared once the client determines that the goods ordered by a customer are available.
c. A bill of lading provides documentation that the customer has received the goods.
d. Sales transactions typically begin with the receipt of a purchase order from a customer.
3. Which of the following would not represent a factor the auditor would consider when assessing the inherent risk associated with a sales transaction?
a. The existence of terms that specify the right of return or the right to modify the purchase agreement.
b. Contracts that are a combination of leases and sales.
c. Goods billed according to a percentage-of-completion methodology.
d. The nature of the credit authorization process.
4. Which of the following statements is false regarding inherent risks associated with accounts receivable?
a. The rights and obligations assertion for accounts receivable may have a high level of inherent risk if the company sells or pledges accounts receivable.
b. If accounts receivable are improperly aged, the allowance for doubtful accounts may be misstated.
c. If the client accepts orders from customers with poor credit, the risk associated with the valuation of net accounts receivable is not affected since the customer did indeed place the order.
d. Having the collection of a receivable be contingent on specific events that cannot be easily estimated increases the inherent risk of misstatement of the accounts receivable account.
5. Which of the following factors is not a motivation for clients to fraudulently misstate revenue?
a. Bankruptcy may be imminent.
b. Management bonuses are contingent on a certain revenue goal.
c. Controls over revenue process are ineffective.
d. Management wants to meet publicly announced earnings expectations.
6. Which of the following explanations best describes the purpose of lapping?
a. Lapping is a technique used by client personnel to cover up the embezzlement of cash.
b. Lapping is an approach used by client personnel to eliminate differences between a customer's records and the client's records reported on confirmations.
c. Lapping is a procedure used by the auditor to obtain evidence when a positive confirmation is not returned by the client's customer.
d. Lapping is an agreement containing contract terms that are not part of a formal sales contract.
7. Which of the following should an auditor gain an understanding of as part of the risk assessment procedures?
a. Internal controls related to revenue recognition.
b. Revenue-related computer applications.
c. Key revenue-related documents.
d. All of the above.
8. Consider an organization that sells products through a catalog and takes orders over the phone. All orders are entered online, and the organization's objective is to ship all orders within 24 hours. The audit trail is kept in machine-readable form. The only papers generated are the packing slip and the invoice sent to the customer. Revenue is recorded upon shipment of the goods. The organization maintains a detailed customer database that allows the customer to return goods for credit at any time. The company maintains a product database containing all the authorized prices. Only the marketing manager has authorization to make changes in the price database. The marketing manager either makes the changes or authorizes the changes by signing an authorization form, and his assistant implements the changes. Which of the following controls would be least effective in assuring that the correct product is shipped and that it is billed at the approved price?
a. Self-checking digits are used on all product numbers, and customers must order from a catalog with product numbers.
b. The sales order taker verbally verifies both the product description and price with the customer before the order is closed for processing.
c. The sales order taker prepares batch totals of the number of items ordered and the total dollar amount for all items processed during a specified period of time (e.g., one hour).
d. The product price table is restricted to the director of marketing, who alone can approve changes to the price file.