ACCT 405 - Unit 3 Exam | Actual study |
Questions and verified Answers
Revenue is defined as - ANSW-inflows or other enhancements of assets of an entity or settlements of its
liabilities from delivering or producing goods, rendering services, or other activities that constitute the
entity's major or central operations
Five steps to revenue recognition - ANSW-identify the contracts with a customer; identify the
performance obligations in the contract; determine the transaction price; allocate the transaction price
to the performance obligation in the contract; recognized revenue when the entity satisfies a
performance obligation
Fraud risks in revenue recognition - ANSW-side agreements, channel stuffing, related party transactions,
bill and hold sales
Types of transactions typically processed through the revenue process - ANSW-the sale of goods or
rendering of a service for cash or credit; the receipt of cash from the customer in payment for goods or
services; the return of goods by the customer for credit or cash
Accounts that the revenue process affects - ANSW-sales transactions; trade accounts receivable, sales,
allowance for uncollectible accounts, bad-debt expense; cash receipts transactions; cash, trade accounts
receivable, cash discounts; sales return and allowance transactions; sales returns, sales allowances, trade
accounts receivables
Credit approval form - ANSW-for credit sales, the entity must have a formal procedure for investigating
the creditworthiness of the customer
Customer sales order - ANSW-contains the details of the type and quantity of products or services
ordered by the customer
Open order report - ANSW-a report of all customer orders for which processing has not been completed
Shipping document - ANSW-serves as a bill of lading and contains information on the type of product
shipped, the quantity shipped, and other relevant information
Sales invoice - ANSW-used to bill the customer. Contains information on the type of product or service,
the quantity, the price, and the terms of trade
Sales journal - ANSW-once a sales invoice has been issued, and revenue can be recognized, the sale
needs to be recorded in the accounting records. Used to record information about the sales transaction
Customer statement - ANSW-this document is mailed or emailed to the customer and contains details of
all sales, cash receipts, and credit memorandum transactions
Accounts receivable subsidiary ledger - ANSW-this ledger contains an account and the details of
transactions for each customer
Aged trial balance of accounts receivable - ANSW-this report summarizes all the customer balances in
the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of
several past due categories
Remittance advice - ANSW-this is usually the part of the customers bill that should be returned with the
payment
Cash receipts journal - ANSW-this journal is used to record the cash receipts of the entity
Credit memorandum - ANSW-this document is used to record credits for the return of good by a
customer
, Write-off authorization - ANSW-this document authorizes the write-off of an uncollectible account
receivable. Final approval is generally authorized by the treasurer
Order Entry function of the revenue process - ANSW-acceptance of customer orders for goods and
services into the system in accordance with management criteria
Credit Authorization function of the revenue process - ANSW-appropriate approval of customer orders
for creditworthiness
Shipping function of the revenue process - ANSW-shipping of goods that has been authorized
Billing function of the revenue process - ANSW-issuance of sales invoices to customers for goods shipped
or services provided; also, processing of billing adjustments for allowances, discounts, and returns
Cash Receipts function of the revenue process - ANSW-processing of the receipt of cash from customers
Accounts Receivable function of the revenue process - ANSW-recording of all sales invoices, collections,
and credit memoranda in individual customer accounts
General Ledger function of the revenue process - ANSW-proper accumulation, classification, and
summarization of revenues, collections, and receivables in the financial statement accounts
Order entry - ANSW-the initial function in the revenue process is the entry of a new sale order into the
system
Credit authorization - ANSW-the credit authorization process must determine that the customer is able
to pay for the goods or services purchased. Failure to properly authorize credit can lead to extensive bad
debts for the entity
Shipping - ANSW-goods should not be shipped, nor should services be provided without proper
authorization. The main control is payment or proper credit authorization
Billing - ANSW-the objective of proper billing is the ensure that all goods shipped, and all services
rendered are billed to the customer
Cash receipts - ANSW-all cash collected must be properly identified and promptly deposited intact at the
bank
Accounts receivable - ANSW-all billings, adjustments, and cash collections must be properly recorded in
the customers' accounts receivable records
General ledger - ANSW-as related to the revenue process, the general ledger function must ensure that
all revenues, collections, and receivables are properly accumulated, classified, and summarized in the
accounts
The four inherent risk factors that may affect the revenue process - ANSW-industry related factors; the
complexity and contentiousness of revenue recognition issues; the difficulty of auditing transactions and
account balances; misstatements detected in prior audits
Control risk assessment - ANSW-understand and document the revenue process based on a reliance
strategy; plan and perform tests of controls on revenue transactions; set and document the control risk
for the revenue process
understanding the control environment is - ANSW-generally completed on an overall entity basis
the entity's risk assessment process - ANSW-the auditor must understand how management considers
risks that are relevant to the revenue process. The auditor should estimate the significance of the risk
and assess the likelihood of occurrence
control activities - ANSW-the auditor identifies what controls ensure that the assertions for transactions
and events are being met
Questions and verified Answers
Revenue is defined as - ANSW-inflows or other enhancements of assets of an entity or settlements of its
liabilities from delivering or producing goods, rendering services, or other activities that constitute the
entity's major or central operations
Five steps to revenue recognition - ANSW-identify the contracts with a customer; identify the
performance obligations in the contract; determine the transaction price; allocate the transaction price
to the performance obligation in the contract; recognized revenue when the entity satisfies a
performance obligation
Fraud risks in revenue recognition - ANSW-side agreements, channel stuffing, related party transactions,
bill and hold sales
Types of transactions typically processed through the revenue process - ANSW-the sale of goods or
rendering of a service for cash or credit; the receipt of cash from the customer in payment for goods or
services; the return of goods by the customer for credit or cash
Accounts that the revenue process affects - ANSW-sales transactions; trade accounts receivable, sales,
allowance for uncollectible accounts, bad-debt expense; cash receipts transactions; cash, trade accounts
receivable, cash discounts; sales return and allowance transactions; sales returns, sales allowances, trade
accounts receivables
Credit approval form - ANSW-for credit sales, the entity must have a formal procedure for investigating
the creditworthiness of the customer
Customer sales order - ANSW-contains the details of the type and quantity of products or services
ordered by the customer
Open order report - ANSW-a report of all customer orders for which processing has not been completed
Shipping document - ANSW-serves as a bill of lading and contains information on the type of product
shipped, the quantity shipped, and other relevant information
Sales invoice - ANSW-used to bill the customer. Contains information on the type of product or service,
the quantity, the price, and the terms of trade
Sales journal - ANSW-once a sales invoice has been issued, and revenue can be recognized, the sale
needs to be recorded in the accounting records. Used to record information about the sales transaction
Customer statement - ANSW-this document is mailed or emailed to the customer and contains details of
all sales, cash receipts, and credit memorandum transactions
Accounts receivable subsidiary ledger - ANSW-this ledger contains an account and the details of
transactions for each customer
Aged trial balance of accounts receivable - ANSW-this report summarizes all the customer balances in
the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of
several past due categories
Remittance advice - ANSW-this is usually the part of the customers bill that should be returned with the
payment
Cash receipts journal - ANSW-this journal is used to record the cash receipts of the entity
Credit memorandum - ANSW-this document is used to record credits for the return of good by a
customer
, Write-off authorization - ANSW-this document authorizes the write-off of an uncollectible account
receivable. Final approval is generally authorized by the treasurer
Order Entry function of the revenue process - ANSW-acceptance of customer orders for goods and
services into the system in accordance with management criteria
Credit Authorization function of the revenue process - ANSW-appropriate approval of customer orders
for creditworthiness
Shipping function of the revenue process - ANSW-shipping of goods that has been authorized
Billing function of the revenue process - ANSW-issuance of sales invoices to customers for goods shipped
or services provided; also, processing of billing adjustments for allowances, discounts, and returns
Cash Receipts function of the revenue process - ANSW-processing of the receipt of cash from customers
Accounts Receivable function of the revenue process - ANSW-recording of all sales invoices, collections,
and credit memoranda in individual customer accounts
General Ledger function of the revenue process - ANSW-proper accumulation, classification, and
summarization of revenues, collections, and receivables in the financial statement accounts
Order entry - ANSW-the initial function in the revenue process is the entry of a new sale order into the
system
Credit authorization - ANSW-the credit authorization process must determine that the customer is able
to pay for the goods or services purchased. Failure to properly authorize credit can lead to extensive bad
debts for the entity
Shipping - ANSW-goods should not be shipped, nor should services be provided without proper
authorization. The main control is payment or proper credit authorization
Billing - ANSW-the objective of proper billing is the ensure that all goods shipped, and all services
rendered are billed to the customer
Cash receipts - ANSW-all cash collected must be properly identified and promptly deposited intact at the
bank
Accounts receivable - ANSW-all billings, adjustments, and cash collections must be properly recorded in
the customers' accounts receivable records
General ledger - ANSW-as related to the revenue process, the general ledger function must ensure that
all revenues, collections, and receivables are properly accumulated, classified, and summarized in the
accounts
The four inherent risk factors that may affect the revenue process - ANSW-industry related factors; the
complexity and contentiousness of revenue recognition issues; the difficulty of auditing transactions and
account balances; misstatements detected in prior audits
Control risk assessment - ANSW-understand and document the revenue process based on a reliance
strategy; plan and perform tests of controls on revenue transactions; set and document the control risk
for the revenue process
understanding the control environment is - ANSW-generally completed on an overall entity basis
the entity's risk assessment process - ANSW-the auditor must understand how management considers
risks that are relevant to the revenue process. The auditor should estimate the significance of the risk
and assess the likelihood of occurrence
control activities - ANSW-the auditor identifies what controls ensure that the assertions for transactions
and events are being met
