You will find 2 files attached, one for the questions and the other for the answers. Here are the number of the questions that are required:
11-26
11-29
11-31
11-39
All you have to do is to paraphrase the answers.
Microsoft Word - SMChap011.doc Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue 11-1 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue 11-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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. 11–8 All sales invoices should be serially numbered. Each day the billing department should send copies of the invoices prepared that day to the accounts receivable department accompanied by a transmittal letter specifying the invoice numbers used and the total dollar amount billed. By comparing the individual invoices with the list of serial numbers and comparing the total debits to accounts receivable with the total figure for billings, the accounts receivable department can be sure that it has received and recorded all sales invoices. 11–9 Other specific procedures which contribute to good internal control over the business processes related to accounts receivable include (only three required): (1) The separation of the duties of the accounts receivable accountant from all cash handling functions. (2) Regular balancing of the subsidiary ledger of receivables with the general ledger control account by an employee other than the accounts receivable accountant. (3) Regular aging of accounts receivable and review by management. (4) Periodic review of delinquent accounts by an appropriate executive. (5) Periodic confirmation of accounts receivable by internal auditors. (6) Serial numbering of shipping documents, sales invoices, and credit memoranda, and regular accounting for all numbers in the series. 11–10 The auditors should confirm with the bank the loss contingency for notes receivable discounted. The auditors also should send separate confirmation requests to the makers of the notes receivable that were discounted to determine the genuineness and validity of the notes. 11–11 The write-off of small notes receivable from officers, directors, stockholders, or affiliated companies is obviously irregular and unacceptable practice. Such notes are almost always collectible by virtue of the positions held by the makers. The auditors should investigate these related party transactions fully; they will probably find that the charges to the allowance for uncollectible notes were made in error and were not authorized by management. If the amounts were large, there would be more reason to suspect an intention of self-serving activities or fraud on the part of the management. 11–12 Among the audit procedures commonly applied to notes receivable but not to accounts receivable are the following: (1) Verification of interest earned and accrued interest receivable. (2) Examination of the note. 11–13 The client company should request (on its letterhead) the customer to confirm the account receivable. The auditors have no authority to make such a request directly on their stationery. The return envelope should be addressed to the auditors' office to assure that the auditors have control over confirmation returns. Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue 11-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 11–14 The audit objective of determining the existence of receivables is most directly addressed by the audit procedure of confirming accounts receivable and notes receivable by direct communication with debtors. In addition, written confirmation also addresses the completeness and valuation assertions, but less effectively because it deals only with recorded accounts and provides limited information on whether the receivable is collectible. The procedure also provides evidence of occurrence and accuracy of revenue transactions. 11–15 If the auditors find post office box addresses for many individual customers whose accounts were selected for confirmation, the auditors should consider the possibility that the customers may be fictitious, and that dishonest employees of the client company plan to "answer" the confirmation requests. 11–16 Alternative auditing procedures to verify accounts receivable when confirmation is not practicable or possible include examination of customers' purchase orders or contracts; examination of client's duplicate shipping documents and invoices; and review of payments received from customers subsequent to the balance sheet date. 11–17 Alternate auditing procedures that may be used when customers have not replied to confirmation requests include: (1) Send additional requests by registered or certified mail, with return receipt requested. (2) The auditors might telephone to ascertain the balance or the reason for failure to respond to the written request. (3) Under some circumstances, requests may be made by fax machine. (4) The auditors may examine any payments to the account made subsequent to the balance sheet date. The auditors may also examine the duplicate invoices, shipping records, purchase orders, and so on, for transactions making up the unpaid balance. 11–18 To test the client's sales cutoff at June 30, the auditors should compare shipping records with entries in the sales journal, and receiving records with entries recording sales returns, for several days prior to and subsequent to June 30. The auditors will be alert for sales and sales returns recorded in the wrong accounting period. 11–19 An unusually large number of sales transactions just prior to the balance sheet date should be fully investigated by the auditors. This situation may result from a strenuous effort made during the closing days of the period to get out shipments and meet a sales quota. On the other hand, it may reflect an improper cutoff of sales transactions at year-end, or even the recording of fictitious sales. In any event, the auditors' investigation should include matching of sales invoices with shipping documents and customers' orders, and discussions with executives. Careful analysis of sales returns during the succeeding period may also shed light on the situation. 11–20 Excessive sales returns or allowances may indicate shipments made without customers' orders, shipments of defective merchandise, a misstatement of inventory or of sales and receivables, or weaknesses in internal control. One purpose of a review of sales returns and allowances subsequent to the balance sheet date is to uncover any facts that necessitate adjustment of inventories, receivables, or sales in the statements being audited. Another purpose is to test internal control effectiveness. Chapter 11 - Accounts Receivable, Notes Receivable, and Revenue 11-4 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 11–21 The credit memoranda should bear the date and serial number of the receiving report on the return shipment. The credit memoranda selected by the auditors for testing can be compared with records of the receiving department to determine that goods were actually returned. 11–22 In testing the adequacy of the client company's allowance for doubtful accounts receivable, the auditors review the following: