Chapter 10: Auditing Revenue and Related Accounts
Chapter 10: Auditing
Revenue and Related Accounts
1. The revenue cycle considered by auditors includes the sales process but not cash collections.
2. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the
transaction and collecting the receivable.
3. The shipping department confirms the shipment of goods by completing the packing slip and returning it to
the purchasing department.
4. Monthly statements provide a detailed list of the customer’s activity for the previous month and a listing of
all open items.
5. Invoices are processed, including their mailing to customers, only subsequent to proof of valid delivery to
6. The use of prenumbered sales invoices is the primary control procedure to satisfy the assertion of
7. A comprehensive chart of accounts and a review of complex or unusual transactions by supervisory
personnel are control procedures necessary for proper classification of accounts.
8. Formal procedures for approving acceptance of returns that are beyond the warranty period are an appropriate
control procedure for identifying and recording returned goods.
9. One of the benefits of establishing a formal credit policy for granting credit is that management does not need
to perform monitoring of accounts receivable.
10. Monitoring of the revenue cycle may be accomplished partially through the use of exception reporting
11. Monitoring is one of the five components of the COSO internal control framework.
12. The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to
revenue misstatements on every engagement.
13. A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it
leases until the customer is ready for the product should record the delivery as revenue.
14. The intentional loading of sales at the end of a period to customers that do not need the goods at that time
should not be recorded as revenues.
15. All companies attempting to comply with GAAP should refer to the Securities and Exchange Commission
for guidance as it supersedes all AICPA, PCAOB, FASB and EITF literature.
16. A tendency for fraud exists when stock options are close to becoming exercised by executives and financial
17. A red flag that may alert the auditor to fraud in the revenue cycle is a trend of revenue growth that is
consistent with industry results.
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