Auditing Chapter 9 Pre Quiz

It is typical that all five assertions for revenue are equally important.

If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion.

The allowance for doubtful accounts has important implications for the ownership assertion of accounts receivable.

Audit evidence about the existence of revenues is also the most appropriate evidence about the valuation of receivables.

Bankruptcy may be imminent

Management bonuses are contingent on a certain revenue goal

Management wants to meet publicly announces earnings expectations

Controls over revenue process are ineffective

Lapping is a procedure used by the auditor to obtain evidence the client's customer does return a positive confirmation.

Lapping is an agreement containing contract terms that are not part of a formal sales contract.

Lapping is a technique used by client personnel to cover up the embezzlement of cash.

Lapping is an approach used by client personnel to eliminate differences between a customer's records and the client's records reported on confirmations.

In 2012, the PCAOB settled a disciplinary order censuring Ernst & Young (EY), imposing a $2 million penalty against the firm and sanctioning four of its current and former partners.

The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts.

EY did not properly evaluate Medicis' practice of reserving for most of its estimated product returns at replacement cost, instead of at gross sales price. It appears that EY accepted the company's basis for reserving at replacement cost when the auditors should have known that this approach would not be supported by the audit evidence.

The PCAOB investigation revealed that by using replacement cost for the reserve, rather than gross sales price, Medicis' reported sales returns reserve were materially understated and its reported revenue was materially overstated.

All of these are true

The only evidence the auditor plans to obtain is from tests of details.

The auditor plans to obtain 40% of the necessary audit evidence from tests of controls and the remaining 60% from substantive analytical procedures.

The auditor plans to obtain the majority of the necessary audit evidence from tests of controls.

Any of these would be an appropriate audit plan if the auditor believes that control risk is high.

Select a sample of customer purchase orders and trace through to the generation of a sales invoice.

Select a sample of customer purchase orders to determine whether a valid customer actually exists.

Select a sample of shipping documents (bills of lading) and trace to the sales invoice to determine whether the invoice was properly recorded.

Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods.