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Unformatted text preview: CHAPTER 11 Accounts Receivable, Notes Receivable, and Revenue Review Questions 11-1 The term "customer's order" refers to the purchase order received from a customer. The term "sales order" refers to the document created upon receipt of a customer's order. The sales order is a translation of the terms of the customer's order into a set of specific instructions for the guidance of various departments, including the credit department, finished goods, stores, shipping, billing, and accounts receivable. 11-2 The audit of revenue and receivables is of significant audit risk because (1) overstatement of revenue has been a factor in many instances of fraudulent financial reporting, (2) the overstatement of revenue results in a corresponding overstatement of net income, (3) the determination of the amount of revenue recognized may be determined by the application of complex accounting principles, and (4) significant accounting estimates may be involve in the determination of the financial statement presentation of receivables and revenue. 11-3 Good internal control in the billing process requires that someone other than the employee preparing the invoice shall review the accuracy of prices, credit terms, and other data on the invoice before this document is released. 11-4 The objective of the billing process is to notify the customer of the amount due for goods or services delivered. A most important document created by the billing department is the sales invoice. The original is sent to the customer, and copies are used to record accounts receivable and sales. 11-5 The statement is incorrect. Credit memoranda are used to credit (reduce) accounts receivable when goods sold on credit are being returned, or when a defect in the goods justifies a price reduction. Credit memoranda are not issued to remove uncollectible accounts receivable from the records. Such write-off of worthless receivables is handled by a general journal entry debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable. 11-6 The sales invoices (and the shipping documents as well) should be serially numbered. When each day's invoices are transmitted from the billing department to the accounts receivable department, they should be accompanied by a transmittal list showing the serial numbers of all sales invoices. Every number in the series should be accounted for. If a computer is used to record sales invoices item counts and control totals should be used to ensure that all sales are recorded. 11-7 The statement is correct in suggesting that voided shipping documents should be cancelled. However, they should be retained, and not discarded so as to assure that the numerical sequence may be accounted for....
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