Positive confirmations are generally used when an

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Positive confirmations are generally used when an account contains large individual balances or if errors are anticipated because control risk was judged to be high. Negative confirmation requests are used when there are a large number of accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmation. 10-11 Other types of receivables that the auditor should examine include: Receivables from officers and employees Receivables from related parties Notes receivable The auditor would confirm and evaluate each type of receivable for collectibility. The transactions that result in receivables from related parties are examined to determine if they were at "arm's length." Notes receivable would also be confirmed and examined for repayment terms and whether interest income has been properly recognized. 10-4
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Chapter 10 - Auditing the Revenue Process Answers to Multiple-Choice Questions 10-12 c 10-18 b 10-13 d 10-19 a 10-14 c 10-20 c 10-15 b 10-21 a 10-16 a 10-22 a 10-17 d 10-23 b Solutions to Problems 10-24 1. The guidance provided by SAB No. 101 would preclude recognition of revenue on this transaction in the current period. Thompson’s business practice of requiring a written sales agreement for this class of customer, persuasive evidence of an arrangement would require properly authorized personnel of the customer have executed final agreement. Bayonne’s execution of the sales agreement after the end of the quarter causes the transaction to be considered a transaction of the subsequent period. 2. Provided that other criteria for revenue recognition are met, Best Products should recognize revenue from sales of its layaway program upon delivery of the merchandise to the customer. Until then, the amount of cash received should be recognized as a liability. Because Best Products retains the risk of ownership of the merchandise, receives only a deposit from the customer, and does not have an enforceable right to the remainder of the purchase price, SAB No. 101 would not allow recognition of the revenue. 3. It would not be appropriate for Dave’s to recognize the membership fees as earned revenue upon billing or receipt of initial fee with a corresponding accrual of estimated costs to provide the membership services. This conclusion is based on Dave’s remaining and unfulfilled contractual obligation to perform services throughout the remaining period. Therefore, the earnings process, irrespective of whether a cancellation clause exists, is not complete. Additionally, the ability of the member to receive full refund of the membership fee up to the last day of the membership term raises uncertainty as to whether the fee is fixed or determinable at any point before the end of the term. 10-5
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Chapter 10 - Auditing the Revenue Process 10-25 The following weaknesses in the existing informal control system over cash admission fees should be identified by Smith along with the related recommendation for improvement: Weakness Recommendation 2. There is no segregation of duties between persons responsible for collecting admission fees and persons responsible for authorizing admission.
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  • Spring '12
  • Na
  • Revenue, Generally Accepted Accounting Principles

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