Auditing the Sales Cycle

Check your understanding

5 questions

1. 1. Which of the following accounts is typically included in the sales cycle?
   Sales and accounts payableCommodity tax collection and bad debt expenseInventory and cost of goods soldNotes payable and cash disbursements
2. 2. The primary purpose of walking through a transactional cycle during an audit is to:
   Finalize the financial statements for the clientComplete substantive testing of account balancesAssess control risk by understanding how transactions flow and identifying relevant controlsDetermine materiality thresholds for the engagement
3. 3. An auditor performing a walkthrough of the sales cycle would most likely be focused on which type of audit procedure?
   Analytical procedures comparing current-year sales trendsTests of details on year-end accounts receivable balancesTests of controls to evaluate whether key controls are operating effectivelyRecalculation of the allowance for doubtful accounts
4. 4. Why would an auditor include cash receipts as part of the sales cycle rather than treating it as a separate cycle?
   Cash receipts relate exclusively to investing activitiesIt simplifies the preparation of the financial statementsCash receipts represent the completion of the revenue transaction and must be traced to ensure sales are properly collected and recordedCash receipts are only included when fraud risk is assessed as high
5. 5. An auditor discovers that there is no segregation of duties between the employee who authorizes sales and the employee who records accounts receivable. Which assertion about the sales cycle is most directly threatened by this weakness?
   Presentation and disclosureValuation of inventoryOccurrence and accuracy of recorded salesCompleteness of cash disbursements