Test Bank: Auditing and Assurance Services Chapter 14 – Sales & Collection Cycle (Questions & Answers)

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)
Chapter 14 Audit of the Sales and Collection Cycle: Tests of Controls
and Substantive Tests of Transactions

14.1 Learning Objective 14-1

1) Which of the following is an account that is not affected by the sales and collection cycle?
A) cash
B) accounts receivable
C) allowance for doubtful accounts
D) accounts payable
Answer: D
Terms: Sales and collection cycle
Diff: Easy
Objective: LO 14-1
AACSB: Reflective thinking

2) The auditor's objectives for the sales and cash collections activities when the client is
primarily an e-commerce business as compared to a "brick and mortar" business are
A) unchanged.
B) expanded.
C) mitigated.
D) decreased.
Answer: A
Terms: Auditor's objectives for sales and cash collections
Diff: Moderate
Objective: LO 14-1
AACSB: Analytic thinking

3) The overall objective in the audit of the sales and collection cycle is to evaluate whether the
account balances affected by the cycle are fairly presented in accordance with accounting
standards.
Answer: TRUE
Terms: Objective in audit of sales and collection cycle; Account balances fairly presented
Diff: Easy
Objective: LO 14-1
AACSB: Reflective thinking

4) The sales and collection cycle applies to businesses that sell goods to customers or provide
services to customers.
Answer: TRUE
Terms: Sales and collection cycle
Diff: Moderate
Objective: LO 14-1
AACSB: Reflective thinking



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,14.2 Learning Objective 14-2

1) Which of the following is not one of the five classes of transactions included in the sales and
collection cycle?
A) sales returns and allowances
B) write-off of uncollectible accounts
C) bad debt expense
D) interest income
Answer: D
Terms: Classes of transactions; Sales and collection cycle
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

2) What event initiates a transaction in the sales and collection cycle?
A) receipt of cash
B) delivery of product to a customer
C) identification of a new customer
D) customer request for goods or services
Answer: D
Terms: Customer request for goods
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

3) A ________ is a document that indicates a request for merchandise by a customer.
A) sales invoice
B) vendor invoice
C) customer order
D) sales order
Answer: C
Terms: Customer order
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

4) A ________ is a document for communicating the description, quantity, and related
information for goods ordered by a customer.
A) sales order
B) customer order
C) vendor invoice
D) sales invoice
Answer: A
Terms: Sales order
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking
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,5) What critical event must take place before goods can be shipped in order to assure payment
can be reasonably expected?
A) determination of correct delivery address
B) credit approval
C) matching of shipping document with sales invoice
D) receipt of sales order from the customer
Answer: B
Terms: Goods shipped on account; credit approval
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

6) Before goods are shipped on account, a properly authorized person must
A) prepare the sales invoice.
B) approve the journal entry.
C) approve the customer's credit.
D) verify that the unit price is accurate.
Answer: C
Terms: Goods shipped on account; credit approval
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

7) One type of shipping document is the ________, which is a written contract between the
carrier and the seller of the receipt and shipment of goods.
A) sales order
B) bill of lading
C) sales invoice
D) customer order
Answer: B
Terms: Document prepared to initiate shipment of goods
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

8) The document used to indicate to the customer the amount of a sale and payment due date is
the
A) sales invoice.
B) bill of lading.
C) purchase order.
D) sales order.
Answer: A
Terms: Document used to indicate amount of sale and payment due date
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking
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, 9) Which of the following is not an important aspect of billing?
A) All shipments made have been billed.
B) No shipment has been billed more than once.
C) Each customer is billed for the proper amount.
D) Credit is approved to customers for sales on account.
Answer: D
Terms: Sales and collection cycle
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

10) Most companies recognize sales revenue when
A) sales are invoiced.
B) payment is received from the customer.
C) goods are shipped.
D) the customer's order is received.
Answer: C
Terms: Recognize sales revenue
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

11) Which of the following is not a business function within the "Sales" class of transactions?
A) processing customer orders
B) granting credit
C) processing and recording sales returns and allowances
D) shipping goods
Answer: C
Terms: Business function within the sales class of transactions
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking

12) The total of the individual account balances in the accounts receivable master file should
equal the
A) total sales for the period.
B) balance of the sales account in the general ledger.
C) total sales less the total cash received for the period.
D) balance of the accounts receivable account in the general ledger.
Answer: D
Terms: Accounts receivable master file
Diff: Easy
Objective: LO 14-2
AACSB: Reflective thinking



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