PRINCIPLES OF AUDITING AND OTHER
ASSURANCE SERVICES EXAM 2026
COMPREHENSIVE STUDY AND ANSWER GUIDE
◉ AR subsidiary ledger. Answer: Contains account and details of
transactions for each customers (Tie-in to GL)
◉ Aged Trial Balance of Accounts Receivable Answer: 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 (Delinquencies and valuation)
◉ Remittance advice Answer: Part of the customer's bill that should
be returned with payment (Supports cash receipts valuation)
◉ Cash receipts journal Answer: a special journal used to record
only cash receipt transactions (sources of cash collections)
◉ Credit memorandum Answer: This document is used to record
credits for the return of goods by a customer. Negates a Sale!
,◉ Write off authorization Answer: This document authorizes the
write-off of an uncollectible account receivable. Final approval is
generally authorized by the treasurer (Bad debt write-offs)
◉ Inherent risk assessment Answer: 1. Industry-related factors.
2. The complexity and contentiousness of revenue recognition
issues.
3. The difficulty of auditing transactions and account balances.
4. Misstatements detected in prior audits.
◉ Control risk assessment: Revenue Answer: 1) Understand and
document the revenue process based on a reliance strategy.
2) Plan and perform tests of controls on revenue transactions
3) Set and document the control risk for the revenue process.
◉ Plan and perform tests of controls Answer: The auditor
systematically examines the client's revenue process to identify
relevant controls that help to prevent, or detect and correct, material
misstatements
- In order to properly set control risk, the auditor must test controls
over revenue process. Such tests may include:
- Inquiry of client personnel
- Inspection of documents and records
-Walkthroughs
,- Reperformance of the control activities
- Observations of the operation of the control
◉ Set and Document the control risk Answer: If the results of the
tests of controls support the planned level of control risk, the
auditor conducts the planned level of substantive procedures for the
account balances.
◉ Two major types of material misstatements in revenue
transactions Answer: 1. Sales to fictitious customers. 2. Recording
revenue when goods have not been shipped or services have not
been performed.
◉ What does the auditor need assurance about regarding recorded
revenue transactions? Answer: That all recorded revenue
transactions are valid.
◉ Completeness of revenue transactions Answer: - Concerns both
management and the auditor
- Goods are shipped or services are performed and no revenue is
recognized.
◉ Controls concerning completeness include Answer: 1. Accounting
for numerical sequence of shipping documents and sales invoices
2. Matching shipping documents with sales invoices
, 3. Reconciling sales invoices to daily sales reports
4. Maintaining and reviewing the open-order file
◉ Authorization and accuracy of revenue transactions Answer: Due
to improper authorization:
- Shipping goods to, or performing services for, customers who are
bad credit risks and making sales at unauthorized prices or terms.
The presence of an authorized price list and terms of trade reduces
the risk of inaccuracies. The sales invoice should also be verified for
mathematical accuracy before being sent to the customer.
◉ Cutoff and classification of revenue transactions Answer: - Sales
may be recorded in the wrong accounting period unless proper
controls are in place. All shipping documents should be forwarded to
the billing department daily.
- The use of a chart of accounts and proper codes for recording
transactions
◉ Occurrence of cash receipts transactions Answer: Cash receipts
are recorded but not deposited in the client's bank account.
ASSURANCE SERVICES EXAM 2026
COMPREHENSIVE STUDY AND ANSWER GUIDE
◉ AR subsidiary ledger. Answer: Contains account and details of
transactions for each customers (Tie-in to GL)
◉ Aged Trial Balance of Accounts Receivable Answer: 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 (Delinquencies and valuation)
◉ Remittance advice Answer: Part of the customer's bill that should
be returned with payment (Supports cash receipts valuation)
◉ Cash receipts journal Answer: a special journal used to record
only cash receipt transactions (sources of cash collections)
◉ Credit memorandum Answer: This document is used to record
credits for the return of goods by a customer. Negates a Sale!
,◉ Write off authorization Answer: This document authorizes the
write-off of an uncollectible account receivable. Final approval is
generally authorized by the treasurer (Bad debt write-offs)
◉ Inherent risk assessment Answer: 1. Industry-related factors.
2. The complexity and contentiousness of revenue recognition
issues.
3. The difficulty of auditing transactions and account balances.
4. Misstatements detected in prior audits.
◉ Control risk assessment: Revenue Answer: 1) Understand and
document the revenue process based on a reliance strategy.
2) Plan and perform tests of controls on revenue transactions
3) Set and document the control risk for the revenue process.
◉ Plan and perform tests of controls Answer: The auditor
systematically examines the client's revenue process to identify
relevant controls that help to prevent, or detect and correct, material
misstatements
- In order to properly set control risk, the auditor must test controls
over revenue process. Such tests may include:
- Inquiry of client personnel
- Inspection of documents and records
-Walkthroughs
,- Reperformance of the control activities
- Observations of the operation of the control
◉ Set and Document the control risk Answer: If the results of the
tests of controls support the planned level of control risk, the
auditor conducts the planned level of substantive procedures for the
account balances.
◉ Two major types of material misstatements in revenue
transactions Answer: 1. Sales to fictitious customers. 2. Recording
revenue when goods have not been shipped or services have not
been performed.
◉ What does the auditor need assurance about regarding recorded
revenue transactions? Answer: That all recorded revenue
transactions are valid.
◉ Completeness of revenue transactions Answer: - Concerns both
management and the auditor
- Goods are shipped or services are performed and no revenue is
recognized.
◉ Controls concerning completeness include Answer: 1. Accounting
for numerical sequence of shipping documents and sales invoices
2. Matching shipping documents with sales invoices
, 3. Reconciling sales invoices to daily sales reports
4. Maintaining and reviewing the open-order file
◉ Authorization and accuracy of revenue transactions Answer: Due
to improper authorization:
- Shipping goods to, or performing services for, customers who are
bad credit risks and making sales at unauthorized prices or terms.
The presence of an authorized price list and terms of trade reduces
the risk of inaccuracies. The sales invoice should also be verified for
mathematical accuracy before being sent to the customer.
◉ Cutoff and classification of revenue transactions Answer: - Sales
may be recorded in the wrong accounting period unless proper
controls are in place. All shipping documents should be forwarded to
the billing department daily.
- The use of a chart of accounts and proper codes for recording
transactions
◉ Occurrence of cash receipts transactions Answer: Cash receipts
are recorded but not deposited in the client's bank account.
