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Chapter 16Output and the Exchange Ratein the Short RunChapter OrganizationDeterminants of Aggregate Demand in an Open EconomyDeterminants of Consumption DemandDeterminants of the Current AccountHow Real Exchange Rate Changes Affect the Current AccountHow Disposable Income Changes Affect the Current AccountThe Equation of Aggregate DemandThe Real Exchange Rate and Aggregate DemandReal Income and Aggregate DemandHow Output is Determined in the Short RunOutput Market Equilibrium in the Short Run: The DD ScheduleOutput, the Exchange Rate, and Output Market EquilibriumDeriving the DD ScheduleFactors that Shift the DD ScheduleAsset Market Equilibrium in the Short Run: The AA ScheduleOutput, the Exchange Rate, and Asset Market EquilibriumDeriving the AA ScheduleFactors that Shift the AA ScheduleShort-Run Equilibrium for the Economy: Putting the DD and AA Schedules Together Temporary Changes in Monetary and Fiscal PolicyChapter 16 Output and the Exchange Rate in the Short Run 77Monetary PolicyFiscal PolicyPolicies to Maintain Full EmploymentInflation Bias and Other Problems of Policy FormulationPermanent Shifts in Monetary and Fiscal PolicyA Permanent Increase in the Money SupplyAdjustment to a Permanent Increase in the Money SupplyA Permanent Fiscal Expansion78 Krugman/Obstfeld •International Economics: Theory and Policy, Eighth EditionMacroeconomic Policies and the Current AccountGradual Trade Adjustment and Current Account DynamicsThe J-CurveExchange-Rate Pass-Through and InflationBox: Exchange Rates and the Current AccountSummaryAppendix I: Intertemporal Trade and Consumption DemandAppendix II: The Marshall-Lerner Condition and Empirical Estimates of Trade Elasticities Online Appendix: The IS-LM and the DD-AA ModelChapter OverviewThis chapter integrates the previous analysis of exchange rate determination with a model of short-run output determination in an open economy. The model presented is similar in spirit to the classic Mundell-Fleming model, but the discussion goes beyond the standard presentation in its contrast of the effects of temporary versus permanent policies. The distinction between temporary and permanent policies allows for an analysis of dynamic paths of adjustment rather than just comparative statics. This dynamic analysis brings in the possibility of a J-curve response of the current account to currency depreciation. The chapter concludes with a discussion of exchange-rate pass-through, that is, the response of import prices to exchange rate movements.The chapter begins with the development of an open-economy fixed-price model (an online Appendix discusses the relationship between the IS-LM model and the analysis in this chapter). An aggregate demand function is derived using a Keynesian-cross diagram in which the real exchange rate serves as a shift parameter. A nominal currency depreciation increases output by stimulating exports and reducing imports, given foreign and domestic prices, fiscal policy, and investment levels. This yields a positively sloped output-market equilibrium (DD) schedule in exchange rate-output space. A negatively sloped asset-market equilibrium (AA) schedule completes the model. The derivation of this schedule follows from the analysis of previous chapters. For students who have already taken intermediate macroeconomics, you may want to point out that the intuition behind the slope of the AA curve is identical to that of the LM curve, with theChapter 16 Output and the Exchange Rate in the Short Run 79additional relationship of interest parity providing the link between the closed-economy LM curve and the open-economy AA curve. As with the LM curve, higher income increases money demand and raises the home-currency interest rate (given real balances). In an open economy, higher interest rates require currency appreciation to satisfy interest parity (for a given future expected exchange rate).The effects of temporary policies as well as the short-run and long-run effects of permanent policies can be studied in the context of the DD-AA model if we identify the expected future exchange rate with the long-run exchange rate examined in Chapters 14 and 15. In line with this interpretation, temporary policies are defined to be those which leave the expected exchange rate unchanged, while permanent policies are those which move the expected exchange rate to its new long-run level. As in the analysis in earlier chapters, in the long-run, prices change to clear markets (if necessary). While the assumptions concerning the expectational effects of temporary and permanent policies are unrealistic as an exact description of an economy, they are pedagogically useful because they allow students to grasp how differing market expectations about the duration of policies can alter their qualitative effects. Students may find the distinction between temporary and permanent, on the one hand, and between short run and long run, on the other, a bit confusing at first. It is probably worthwhile to spend a few minutes discussing this topic.80 Krugman/Obstfeld •International Economics: Theory and Policy, Eighth EditionBoth temporary and permanent increases in money supply expand output in the short run through exchange rate depreciation. The long-run analysis of a permanent monetary change once again shows how the well-known Dornbusch overshooting result can occur. Temporary expansionary fiscal policy raises output in the short run and causes the exchange rate to appreciate. Permanent fiscal expansion, however, has no effect on output even in the short run. The reason for this is that, given the assumptions of the model, the currency appreciation in response to permanent fiscal expansion completely “crowds out” exports. This is a consequence of the effect of a permanent fiscal expansion on the expected long-run exchange rate which shifts inward the asset-market equilibrium curve. This model can be used to explain the consequences of U.S. fiscal and monetary policy between 1979 and 1984. The model explains the recession of 1982 and the appreciation of the dollar as a result of tight monetary and loose fiscal policy.The chapter concludes with some discussion of real-world modifications of the basic model. Recent experience casts doubt on a tight, unvarying relationship between movements in the nominal exchange rate and shifts in competitiveness and thus between nominal exchange rate movements and movements in the trade balance as depicted in the DD-AA model. Exchange-rate pass-through is less than complete and thus nominal exchange rate movements are not translated one-for-one into changes in the real exchange rate. Also, the current account may worsen immediately after currency depreciation. This J-curve effect occurs because of time lags in deliveries and because of low elasticities of demand in the short run as compared to the long run. The chapter contains a discussion of the way in which the analysis of the model would be affected by the inclusion of incomplete exchange-rate pass-through and time-varying elasticities. Appendix II provides further information on trade elasticities with a presentation of the Marshall-Lerner conditions and a reporting of estimates of the impact, short-run and long-run elasticities of demand for international trade in manufactured goods for a number of countries.Answers to Textbook Problems1. A decline in investment demand decreases the level of aggregate demand for anylevel of the exchange rate. Thus, a decline in investment demand causes the DDcurve to shift to the left.2. A tariff is a tax on the consumption of imports. The demand for domestic goods, andthus the levelof aggregate demand, will be higher for any level of the exchange rate. This isdepicted in Figure 16.1 as a rightward shift in the output market schedule from DD to D'D'. If the tariff is temporary, thisis the only effect, and output will rise even though the exchange rate appreciates as the economymoves from Points 0 to 1. If the tariff is permanent, however, the long-run expected exchange rate appreciates, so the asset market schedule shifts to A'A'. Theappreciation of the currency is sharperin this case. If output is initially at full employment, then there is no change in output due to a permanent tariff.Chapter 16 Output and the Exchange Rate in the Short Run 81Figure 16.182 Krugman/Obstfeld •International Economics: Theory and Policy, Eighth Edition3. A temporary fiscal policy shift affects employment and output, even if thegovernment maintains a balanced budget. An intuitive explanation for this reliesupon the different propensities to consumeof the government and of taxpayers. If the government spends $1 more and finances this spendingby taxing the public $1 more, aggregate demand will have risen because thegovernment spends the entire $1, while the public reduces its spending by less than $1 (choosing to reduce its saving as well as its consumption). The ultimate effect on aggregate demand is even larger than this first round difference betweengovernment and public spending propensities, since the first round generatessubsequent spending. (Of course, currency appreciation still prevents permanent fiscal shifts from affecting output in our model.)4. A permanent fall in private aggregate demand causes the DD curve to shift inwardand to the left and, because the expected future exchange rate depreciates, the AA curve shifts outward and to the right. These two shifts result in no effect on output, however, for the same reason that a permanent fiscal expansion has no effect on output. The net effect is a depreciation in the nominal exchange rate and, because prices will not change, a corresponding real exchange rate depreciation. Amacroeconomic policy response to this event would not be warranted.5. Figure 16.2 can be used to show that any permanent fiscal expansion worsens thecurrent account.In this diagram, the schedule XX represents combinations of the exchange rate and income for which the current account is in balance. Points above and to the left of XX represent current account surplus, and points below and to the right representcurrent account deficit. A permanent fiscal expansion shifts the DD curve to D'D' and, because of the effect on the long-run exchange rate, the AA curve shifts to A'A'. The equilibrium point moves from 0, where the current account is in balance, to 1, where there is a current account deficit. If, instead, there was a temporary fiscal expansion of the same size, the AA curve would not shift and the new equilibrium would be at Point 2 where there is a current account deficit, although it is smaller than thecurrent account deficit at Point 1. Thus, a temporary increase in governmentspending causes the current account to decline by less than a permanent increase because there is no change in expectations with a temporary shock and thus the AA curve does not move.Chapter 16 Output and the Exchange Rate in the Short Run 83Figure 16.284 Krugman/Obstfeld •International Economics: Theory and Policy, Eighth Edition6. A temporary tax cut shifts the DD curve to the right and, in the absence ofmonetization, has no effect on the AA curve. In Figure 16.3, this is depicted as a shift in the DD curve to D'D', with the equilibrium moving from Points 0 to 1. If the deficit is financed by future monetization, the resulting expectedlong-run nominal depreciation of the currency causes the AA curve to shift to the right to A'A' which gives us the equilibrium Point 2. The net effect on the exchange rate is ambiguous, but output certainly increases more than in the case of a pure fiscal shift.Figure 16.37. A currency depreciation accompanied by a deterioration in the current accountbalance could be caused by factors other than a J-curve. For example, a fall inforeign demand for domestic products worsens the current account and also lowers aggregate demand, depreciating the currency. In termsof Figure 16.4, DD and XX undergo equal vertical shifts, to D'D' and X'X', respectively, resulting ina current account deficit as the equilibrium moves from Points 0 to 1. To detect a J-curve, one might check whether the prices of imports in terms of domestic goods rise when the currency is depreciating, offsetting a decline in import volume and a rise in export volume.Figure 16.48. The expansionary money supply announcement causes a depreciation in theexpected long-run exchange rate and shifts the AA curve to the right. This leads to an immediate increase in outputChapter 16 Output and the Exchange Rate in the Short Run 85and a currency depreciation. The effects of the anticipated policy action thus precede the policy’s actual implementation.9. The DD curve might be negatively sloped in the very short run if there is a J-curve,though the absolute value of its slope would probably exceed that of AA. This isdepicted in Figure 16.5. The effects of a temporary fiscal expansion, depicted as a shift in the output market curve to D'D', would not be altered since it would still expand output and appreciate the currency in this case (the equilibrium points moves from 0 to 1).Figure 16.5Monetary expansion, however, while depreciating the currency, would reduce output in the veryshort run. This is shown by a shift in the AA curve to A'A' and a movement in theequilibriumpoint from 0 to 2. Only after some time would the expansionary effect of monetary policy takehold (assuming the domestic price level did not react too quickly).10. The derivation of the Marshall-Lerner condition uses the assumption of a balancedcurrent account to substitute EX for (q⨯EX*). We cannot make this substitution when the current account is not initially zero. Instead, we define the variable z (q⨯EX*)/EX. This variable is the ratio of imports to exports, denominated in common units.When there is a current account surplus, z will be less than 1, and when there is acurrent account deficit, z will exceed 1. It is possible to take total derivatives of each side of the equation CA EX q EX * and derive a general Marshall-Lernercondition as n z n *z, where n and n* are as defined in the appendix. Thebalanced current account (z 1) Marshall-Lerner condition is a special case of this general condition. A depreciation is less likely to improve the current account thelarger its initial deficit when n* is less than 1. Conversely, a depreciation is more likely to cause an improvement in the current account the larger its initial surplus, again for values of n* less than 1.Figure 16.611. If imports constitute part of the CPI, then a fall in import prices due to anappreciation of the currency will cause the overall price level to decline. The fall in the price level raises real balances. As shown in Figure 16.6, the shift in the output market curve from DD to D'D' is matched by an inward shift of the asset marketequilibrium curve. If import prices are not in the CPI and the currency appreciation does not affect the price level, the asset market curve shifts to A"A" and there is no effect on output, even in the short run. If, however, the overall price level falls due to the appreciation, the shift in the asset market curve is smaller, to A'A', and the initial equilibrium point, Point 1, has higher output than the original equilibrium at Point 0.Over time, prices rise when output exceeds its long-run level, causing a shift in the asset market equilibrium curve from A'A' to A"A", which returns output to its long-run level.12. An increase in the risk premium shifts the asset market curve out and to the right, allelse equal.A permanent increase in government spending shifts the asset market curve in andto the right sinceit causes the expected future exchange rate to appreciate. A permanent rise ingovernment spending also causes the goods market curve to shift down and to the right since it raises aggregate demand. In the case where there is no risk premium, the new intersection of the DD and AA curves after a permanent increase ingovernment spending is at the full-employment level of output, since this is the only level consistent with no change in the long-run price level. In the case discussed in this question, however, the nominal interest rate rises with the increase in the risk premium. Therefore, output must also be higher than the original level of full-employment output; as compared to the case in the text, theAA curve does not shift by as much, so output rises.13. Suppose output is initially at full employment. A permanent change in fiscal policywill cause both the AA and DD curves to shift such that there is no effect on output.Now consider the case where the economy is not initially at full employment. Apermanent change in fiscal policy shifts the AA curve because of its effect on thelong-run exchange rate and shifts the DD curve because of its effect on expenditures.There is no reason, however, for output to remain constant in this case since its initial value is not equal to its long-run level, and thus an argument like the one in the text that shows the neutrality of permanent fiscal policy on output does not carrythrough. In fact, we might expect that an economy that begins in a recession (below Y f) would be stimulated back towards Y f by a positive permanent fiscal shock. If Y does rise permanently, we would expect a permanent drop in the price level (since Mis constant). This fall in P in the long run would move AA and DD both out. We could also consider the fact that in the case where we begin at full employment and there is no impact on Y, AA was shifting back due to the real appreciation necessitated by the increase in demand for home products (as a result of the increase in G). If there isa permanent increase in Y, there has also been a relative supply increase which canoffset the relative demand increase and weaken the need for a real appreciation.Because of this, AA would shift back by less. We do not know the exact effectwithout knowing how far the lines originally move (the size of the shock), but we do know that without the restriction that Y is unchanged in the long run, the argument in the text collapses, and we can have both short run and long run effects on Y.14. If some of the currency appreciation is temporary due to the current account effects,we will see a slightly different process after a permanent fiscal expansion. We would not necessarily still jump from Points 0 to 2 in Figure 16.2 above. We know that over time, the shift in consumption preferences away from the home good (due to the transfer of wealth to foreign consumers) will bring the DD curve back in some, this will cause a small depreciation in the future. Thus, the AA curve may not move in as far, leaving us with less appreciation immediately, but also with a small increase in GDP immediately. Eventually, the DD curve will move back a bit, bringing us back to full employment and with an appreciated currency (though less appreciated than inFigure 16.2).15. The text shows output cannot rise following a permanent fiscal expansion if output isinitially at its long-run level. Using a similar argument, we can show that outputcannot fall from its initial long-run level following a permanent fiscal expansion. A permanent fiscal expansion cannot have an effect on the long-run price level since there is no effect on the money supply or the long-run values of the domesticinterest rate and output. When output is initially at its long-run level, R equals R*, Y equals Y f and real balances are unchanged in the short run. If output did fall, there would be excess money supply and the domestic interest rate would have to fall, but this would imply an expected appreciation of the currency since the interestdifferential (R R *) would then be negative. This, however, could only occur if the currency appreciates in real terms as output rises and the economy returns to long-run equilibrium. This appreciation, however, would cause further unemployment, and output would not rise and return back to Y f. As with the example in the text, this contradiction is only resolved if output remains at Y f.16. It is difficult to see how government spending can rise permanently withoutincreasing taxes or how taxes can be cut permanently without cutting spending.Thus, a truly permanent fiscal expansion is difficult to envision. The one possiblescenario is if the government realized it was on a path to permanent surpluses and it could cut taxes without risking long-run imbalances. Because rational agents are aware the government has a long-run budget constraint, they may assume that any fiscal policy is actually temporary. This would mean that a “permanent” shockwould look just like a temporary one. This is quite similar to the discussion ofProblem 14 in this chapter.17. High inflation economies should have higher pass-through as price setters are used tomaking adjustments faster (menu costs fall over time as people learn how to change prices faster). Thus, a depreciation in a high inflation economy may see a rapidresponse of changing prices, but firms in a low inflation environment may be loathe to increase prices for fear of losing business given that their customersare not accustomed to price changes. In addition, a depreciation by a high inflation economy maybe more likely to have been caused by an increase in the money supply which would lead to price increases on its own anyway, so the pass-through would appear higher.。
月底临近，按照公司的惯例，开始找销售业绩差的销售代表谈话，找个冠冕的理由让她们从酒店滚蛋。
瞧肖楠的模样，苏琪这次该是被淘汰的那个。
楚爱知道这会儿苏琪肯定又把自己骂个遍。
楚爱真是觉得屈得慌。
两人一走，莫纳也回到自己的座位上，收拾桌面的东西，说：“我和你打赌，再回来的时候，苏琪肯定趾高气扬，把谁都不放在眼里。
”楚爱：“那可不一定，这个月的成绩明摆着放那呢，我不信穆怀生能把肖楠怎么样。
莫纳神色轻蔑：“不到最后一刻，谁都不知道结果如何。
我没告诉你吧，林思渺已经开始收拾东西了，这个月酒店里要走不少人呢!”“你说什么？林思渺收拾东西？他要辞职吗？”楚爱急了：“你说话啊，别放屁放一半，让人等着熏!”莫纳不耐烦地看楚爱：“随便说说的，你那么紧张干什么。
我说，你到底有没有想好，我上次和你说的话，你考虑的怎么样了？合计着，我怎么觉得你关心林思渺关心得有些过头？”“我对谁都这样!”楚爱端正身子，平淡地问：“那部门是真的要合并了？”“不信我的，你自己没长嘴不会去问他？”楚爱不等莫纳说完，已经大步跑了出去。
莫纳看着楚爱的背影，双手抱胸，眼眸中神色复杂，一言难清。
问就问，我还抖索你不成!楚爱直接去总监办公室，刚要敲门进去，突然想到肖楠和苏琪在里面。
这时候，林思渺肯定不会在场的。
只得折回去。
楚爱没走几步看见苏米离开的身影，于是加快步子追了上去。
“苏米!”楚爱扬起笑容：“刚从总监那出来？”苏米见是楚爱，热情地说：“不是，刚要去，见里面正忙，就没打扰，等会儿还要在去找总监一次。
”楚爱看见她手上拿的业绩表，明知故问：“成绩汇总出来了？”苏米笑得更轻了，还有一股子“别以为我不知道你要干什么”的表情，随手把报表往楚爱怀里一塞：“我们什么关系，想知道自己的成绩就看呗。
”楚爱右眉跳跳，抛出个媚眼：“还是我们家苏米好!”“谁不知道楚爱你这个月的业绩红得不得了，连莫纳都没比得过你。
将来混发达了，可不要忘记我这个姐妹。
”苏米笑说着，凑过来，继续说：“他们和我说的时候，我还不信呢，结果一统计，你的成绩稳居榜首，看来这次穆总监是少不了要奖你的!”楚爱擦汗：“苏米，你别拿我开心了。
中英文对照学习版Harry Potter and the Prisoner of Azkaban《哈利波特与阿兹卡班囚徒》Chapter SixteenProfessor Trelawney’s Prediction第16章特里劳尼教授的预言Harry’s euphoria at finally winning the Quidditch Cup lasted at l east a week. Even the weather seemed to be celebrating; as June approached, the days became cl oudl ess and sultry, and all anybody felt like doing was strolling into the grounds and fl opping d own on the grass with several pints of iced pumpkin juice, perhaps playing a casual game of Gobstones or watching the giant squid propel itself dreamily across the surface of the lake.终于夺得了魁地奇杯，哈利的兴奋劲至少维持了一个星期。
连天气都像是在庆祝。
临近六月，白天变得晴朗无云，热烘烘的，让人只想带上几品脱冰镇南瓜汁溜达到场地上去，一屁股坐下来，也许可以随意玩上几局高布石，或者看着巨乌贼在湖面上梦幻般地游动。
But they coul dn't. The exams were nearly upon them, and instead of lazing around outsid e, the stud ents were forced to remain insid e the castle, trying to bully their brains into concentrating whil e enticing wafts of summer air drifted in through the wind ows. Even Fred and George Weasl ey had been spotted working; they were about to take their O.W.Ls (Ordinary Wizarding Levels). Percy was getting ready to sit his N.E.W.Ts (Nastily Exhausting Wizarding Tests), the highest qualification Hogwarts offered. As Percy hoped to enter the Ministry of Magic, he need ed top grad es. He was becoming increasingly edgy, and gave very severe punishments to anybody who disturbed the quiet of the common room in the evenings. In fact, the only person who seemed more anxious than Percy was Hermione.可是不行。
CHAPTER 16 Multiple-Choice Questions1. easy Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?a a. Timingb. Realizable valuec. Completenessd. Accuracy2. The two primary classes of transactions in the sales and collection cycle are:easy a. sales and sales discounts.b b. sales and cash receipts.c. sales and sales returns.d. sales and accounts receivable.3. The appropriate evidence to be obtained from tests of details must be decided on a(n): easy a. efficiency basis.c b. effectiveness basis.c. audit objectives basis.d. none of the above.4. easy Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?d a. Accuracyb. Completenessc. Rightsd. Each of the above is a balance-related audit objective5. easy Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?d a. Accuracyb. Completenessc. Rightsd. Detail tie-in6. easy For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?d a. Timing and realizable value.b. Completeness and existence.c. Existence and accuracy.d. Realizable value and cutoff.7. easy Which of the following types of receivables would not deserve the special attention of the auditor?d a. Accounts receivables with credit balances.b. Accounts that have been outstanding for a long time.c. Receivables from affiliated companies.d. Each of the above would receive special attention.8. easy b A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:a. customer list.b. aged trial balance.c. accounts receivable ledger.d. schedule of accounts receivable.9. easy Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:d a. test footing the total column and the columns depicting the aging.b. comparing the total of the trial balance with the general ledger accounts receivableaccount.c. none of the above.d. all of the above.10. easy Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which of the following is not one of those controls?c a. Controls that detect or prevent embezzlements.b. Controls over cutoff.c. Controls over acquisitions.d. Controls related to the allowance for doubtful accounts.11. Cutoff misstatements occur when:easy d a. the auditor mistakenly asks the bank for the end-of-year bank statement instead of thestatement which would include the two succeeding weeks.b. subsequent period transactions are recorded in the current period.c. current period transactions are recorded in the subsequent period.d. both b and c above, but not a.12. Cutoff misstatements occur:easy a. either by error or fraud.a b. by error only.c. by fraud only.d. randomly without causes related to errors or fraud.13. Generally accepted accounting principles require that material sales returns and allowances be: easy a. recorded in the period when the merchandise is returned.c b. recorded in the period when the credit memo is issued.c. matched with related sales.d. recorded as a debit to the sales account.14. easy Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:d a. representation letter.b. negative confirmation.c. bank confirmation.d. positive confirmation.15. A type of positive confirmation known as a blank confirmation:easy a. requests the recipient to fill in the amount of the balance.a b. is considered less reliable than the regular positive confirmation.c. generates as high a response rate as the regular positive confirmation form.d. has all of the attributes of a, b, and c above.16. medium For sales, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.a a. existenceb. completenessc. rightsd. detail tie-in17. medium For cash receipts, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.b a. existenceb. completenessc. rightsd. detail tie-in18. medium Which of the following is likely to be performed first when doing tests of details for accounts receivable?b a. Recorded accounts receivable exist.b. Accounts receivable in the aged trial balance agree with related master file amounts, andthe total is correctly added and agrees with the general ledger.c. Accounts receivable are owned.d. Existing accounts receivable are included.19. medium Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor will:a a. reduce the extent of tests of details of balances.b. reduce the extent of tests of controls.c. reduce the tests of transactions.d. reduce all of the other tests.20. The most important test of details of accounts receivable is the: medium a. detail tie-in of the records.c b. analysis of the allowance for doubtful accounts.c. confirmation of accounts receivable.d. combination of the above.21. medium The extent of the testing of detail tie-in of an aged trial balance depends on all but which of the following?d a. The number of accounts involved.b. The degree to which the master file has been tested as a part of tests of controls tests oftransactions.c. The extent to which the schedule has been verified by an independent person before it isgiven to the auditor.d. The extent of testing depends on each of the above.22. Tests of details of balances are directed to:medium a. balance sheet accounts for all cycles.a b. income statement accounts for all cycles.c. balance sheet accounts for some cycles and income statement accounts for other cycles.d. all general ledger accounts for all cycles.23. The most important test of details of balances for accounts receivable is:medium a. confirmations.a b. recalculation of the aged receivables and uncollectible accounts.c. tracing credit memos for returned merchandise to receiving room reports.d. tracing from shipping documents to journals to the accounts receivable ledger.24. Most tests of accounts receivable and the allowance for uncollectible accounts are based on the: medium a. general ledger balance of each account.d b. results of analytical procedures.c. results of confirmations.d. aged trial balance.25. medium The most important test of details of balances to determine the existence of recorded accounts receivable is:d a. tracing details of sales invoices to shipping documents.b. tracing the credits in accounts receivable to bank deposits.c. tracing sales returns entries to credit memos issued and receiving room reports.d. the confirmation of customers’ balances.26. medium When should auditors not perform alternative procedures in testing the accounts receivable balance?c a. When customers do not return confirmation requests.b. When confirmations are deemed to be ineffective as an audit procedure.c. When confirmations are too costly to use.d. Alternative procedures should never be used.27. medium Because of its central role in auditing of accounts receivable, the ______________ is one of the first items tested.c a. accounts receivable master fileb. customer filec. aged trial balanced. sales register28. If accounts receivable accounts with credit balances are significant, they should be: medium a. written off.c b. moved to the debit side.c. reclassified as accounts payable.d. corrected by making adjusting entries.29. Most tests of accounts receivable are based on what schedule, file, or listing? medium a. Sales master file.b b. Aged accounts receivable trial balance.c. Accounts receivable master file.d. None of the above.30. medium c An auditor discovers that the client records sales returns and allowances in the accounting period in which they occur, under the assumption of approximately equal offsetting errors at the beginning and end of each period.a. This is acceptable.b. This is not acceptable.c. This is acceptable as long as the amounts are not significant.d. This is not acceptable as long as the amounts are not significant.31. medium If the client’s internal control for recording sales returns and allowan ces is evaluated as ineffective:a a. a larger sample is needed to verify cutoff.b. sampling is not appropriate.c. all sales returns must be traced to supporting documentation.d. all sales returns must be confirmed with the customer.32. medium b A customer mails and records a check to a client for payment of an unpaid account on December30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31.a. This is a cutoff misstatement.b. This is a timing difference.c. Both a and b.d. Neither a nor b.33. medium Which of the following audit procedures would not likely detect a client’s decision to pledge or factor accounts receivable?c a. A review of the minutes of the board of directors’ meetings.b. Discussions with the client.c. Confirmation of receivables.d. Examination of correspondence files.34. When do most companies record sales returns and allowances?medium a. During the month in which the sale occurs.b b. During the accounting period in which the return occurs.c. Whenever the customer contacts the company regarding the credit.d. Any of the above is correct.35. Cutoff misstatements can occur for:medium a. sales.d b. sales returns and allowances.c. cash collections.d. any of the above.36. The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is to: medium a. perform extensive detailed testing of cutoff.b b. evaluate the client’s control procedures around cutoff.c. confirm a sample of transactions near period end with customers.d. perform any of the above.37. A positive confirmation is more reliable evidence than a negative confirmation because: medium a. fewer confirmations can be sent out.d b. the auditor has a document which can be used in court.c. the debtor’s lack of response indicat es agreement with the stated balance.d. follow-up procedures can be performed if a response is not received from the debtor.38. The advantage of using the negative form of confirmations is that:medium a a. larger sample sizes can be used without increasing the costs above what would have beenrequired for positive confirmations.b. customer’s silence proves that the balance is correct.c. follow-up procedures are scheduled automatically.d. it is appropriate in all circumstances.39. medium Which of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?d a. Examine credit files for select customers.b. Inquire of the client’s credit manager.c. Review the client’s correspondence files related to select customers.d. Auditors generally perform all of the above procedures.40. medium a When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?a. Send a second confirmation request.b. Examine subsequent cash receipts to determine if the receivable has been paid.c. Examine shipping documents to verify that the merchandise was shipped.d. Examine customer’s purchase order and the duplicate sales invoice to determine that themerchandise was ordered.41. medium Generally accepted accounting principles require that sales returns and allowances be matched with related sales:c a. if practical.b. if required by industry practice.c. if the amounts are material.d. any of the above.42. For which of the following accounts is cutoff least important? medium a. Salesc b. Sales returns and allowancesc. Cash collectionsd. Cutoff is equally important for each of the above.43. medium What are the possible disadvantages of evaluating the allowance for doubtful accounts by reviewing individual non-current balances?c a. Current accounts receivable may be ignored.b. It is difficult to compare results of the current and prior years if such an unstructuredapproach is used.c. Both a and b.d. None of the above.44. Which of the following most likely would be detected by a review of a c lient’s sales cutoff? medium a. Excessive sales discounts.b b. Unrecorded sales for the year.c. Unauthorized goods returned for credit.d. Lapping of year-end accounts receivable.45. The positive (as opposed to the negative) form of receivables confirmation is preferred when: medium a. internal control surrounding accounts receivable is considered to be effective.b b. there is reason to believe that a substantial number of accounts may be in dispute.c. a large number of small balances are involved.d. there is reason to believe a significant portion of the requests will be made.46. medium An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:a a. no reply to a positive confirmation request is received.b. no reply to a negative confirmation request is received.c. collectibility of the receivables is in doubt.d. pledging of the receivables is probable.47. How might the auditor determine whether a client has limited rights to accounts receivable? medium a. Review minutes from board of directors meetings.d b. Inquiries of the client.c. Review bank confirmations.d. Any of the above may be used for this purpose.48. Confirmation of accounts receivable balances normally provides evidence concerning the: medium a. valuation of the balances.c b. rights of the balances.c. existence of the balances.d. completeness of the balances.49. If the auditor decides not to confirm accounts receivable, the auditor should:medium a. always use alternative procedures to audit the accounts receivable.c b. do no more audit work.c. document the reasons for such a decision in the audit files.d. follow b and c, but not a.50. The understatement of sales and accounts receivable is best uncovered by:challenging a. confirming receivables.c b. reviewing the aged trial balance.c. test of transactions for shipments made but not recorded.d. reconciling the accounts receivable general ledger account with the schedule of accountsreceivable.51. challenging a You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:a. before the merchandise was shipped.b. at the time the merchandise was shipped.c. several days subsequent to shipment.d. at a time after the point at which title passed.52. It is easy to test for a cash receipts cutoff error by:challenging a. reconciling the bank statement.d b. performing a four-column proof-of-cash.c. observing the counting of cash at the balance sheet date.d. tracing recorded cash receipts to bank deposits on the bank statement of a different period.53. The most reliable evidence from confirmations is obtained when they are sent:challenging a. as close to the balance sheet date as possible.a b. at various times throughout the year to different segments of the sample, so that the entiresample is representative of account balances scattered throughout the year.c. several months before the year-end, so the auditor will have adequate time to performalternate procedures if they are required.d. at various times throughout the year to the same group in the sample, so that the samplewill not have a time bias.54. challenging Which of the following is not an important consideration in determining the sample size of confirmations?a a. The types of confirmations being sent; that is, positive or negative.b. The results of related analytical procedures.c. Total annual credit sales.d. Each of the above is an important factor.55. challenging d An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:a. overstate the current ratio with no effect on working capital at December 31.b. overstate both working capital and the current ratio at December 31.c. overstate working capital with no effect on the current ratio at December 31.d. leave both working capital and the current ratio unchanged at December 31.56. challenging For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:c a. employee overtime wages.b. credit granted to customers.c. write-offs of customer accounts.d. cash disbursements.57. challenging For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:c a. is detected and correct when cash is separately audited.b. is unlikely to have a material impact on the balance sheet or the income statement.c. affects on the cash and accounts receivable balances on the balance sheet and does notaffect net income.d. rarely occurs given the control consciousness of most entities.Essay Questions58. easy Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement?Answer:The three exceptions are:1. Accounts receivable are immaterial.2. The auditor considers confirmations ineffective evidence because response rates willlikely be inadequate or unreliable.3. The combined level of inherent risk and control risk is low and other substantiveevidence can be accumulated to provide sufficient evidence.59. easy Describe the differences between positive and negative confirmations. Which type is generally viewed as more reliable?Answer:A positive confirmation requests the recipient to respond regardless of whether the balanceas stated on the confirmation is correct or incorrect. In contrast, a negative confirmation requests the recipient to respond only if the balance as stated on the confirmation is incorrect. Positive confirmations are more reliable because the auditor can perform follow-up procedures if a response is not received from the customer.60. medium A threefold approach is typically followed when determining the reasonableness of cutoff. Briefly describe the threefold approach.Answer:First, auditors should decide on the appropriate cutoff criteria. Second, they must evaluate whether the client has established adequate procedures to ensure a reasonable cutoff.Finally, auditors must test whether a reasonable cutoff was obtained.61. medium Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.Answer:For any positive confirmation not returned, the auditor can examine the following to verify the existence of individual sales transactions making up the ending balance in accounts receivable:•Subsequent cash receipts—evidence of the receipt of cash after the confirmation date includes examining remittance advices and entries in the cash receipts records.•Duplicate sales invoices.•Shipping documents.•Correspondence between the customer and the client.62.mediumDescribe how the auditor tests the accuracy objective for accounts receivable.Answer:Confirmation of accounts selected from the trial balance is the most common test of detailsof balances for the accuracy of accounts receivable. When customers do not respond toconfirmation requests, auditors examine supporting documents in the same way asdescribed for the existence objective. Auditors perform tests of the debits and credits toindividual customers’ balances by examining supporting documentation for shipments andcash receipts.63.mediumDescribe how the auditor tests the classification objective for accounts receivable.Answer:Normally, auditors can evaluate the classification of accounts receivable relatively easily,by reviewing the aged trial balance for material receivables from affiliates, officers,directors, or other related parties. Auditors should verify that notes receivable or accountsthat should be classified as noncurrent assets are separated from regular accounts, andsignificant credit balances in accounts receivable are reclassified as accounts payable.64. medium Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.Answer:When testing the detail tie-in objective for accounts receivable, the total column and the columns depicting the aging on the aged trial balance are footed, and the total is compared to the general ledger. In addition, a sample of individual balances on the aged trial balance should be traced to supporting documents to verify the customer’s name, balance, and proper aging. These tests are ordinarily done before any other tests to assure the auditor that the population being tested agrees with the general ledger and accounts receivable master file.65. medium Assuming the client’s internal controls are adequate, describe how the auditor can ve rify proper cutoff of sales transactions.Answer:Assuming the client’s internal controls are adequate, the auditor can verify proper cutoff of sales transactions by obtaining the shipping document number for the last shipment made at the end of the period and comparing this number with current and subsequent period recorded sales.66.mediumDescribe how the auditor tests the rights objective for accounts receivable.Answer:The auditor can test the rights objective for accounts receivable through reviewing theclient’s minutes, discussions with the client, confirmation with banks, and the examinationof correspondence files to determine whether receivables may have been pledged ascollateral, assigned to someone else, factored, or sold.67. medium Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.Answer:The primary advantage of negative confirmations is that they are less expensive than positive confirmations because there are no second requests and no follow-up of nonresponses. The primary disadvantage of negative confirmations is that they are less reliable than positive confirmations because a nonresponse must be regarded as a correct response, even though the debtor may have ignored the confirmation request.68. medium Briefly describe the circumstances in which it is acceptable to use negative confirmation requests.Answer:It is acceptable to use negative confirmation requests only when all of the following circumstances are present:•Accounts receivable is made up of a large number of small accounts.•Combined assessed control risk and inherent risk is low.•There is no reason to believe that the recipients of the confirmations are unlikely to give them consideration.69. medium Describe each of the following types of confirmations:•Positive confirmation•Blank confirmation form•Invoice confirmation•Negative confirmationAnswer:•Positive confirmations are communications addressed to a debtor requesting the recipient to confirm whether the balance as stated on the confirmation is correct orincorrect.•Blank confirmation forms do not state the amount, but requests the recipient to fill in the balance or furnish other information.•Invoice confirmations request a recipient to confirm an individual invoice rather than an entire balance.•Negative confirmations are addressed to debtor, but request responses only if the information is incorrect.70.challengingWhat are the major factors affecting sample size for confirming accounts receivable?Answer:The factors include:•tolerable misstatement,•inherent risk (e.g., relative size of accounts receivable and number of accounts),•control risk,•achieved detection risk form other substantive tests, and•the type of confirmation (e.g., negative normally requires a larger sample size).71. challenging When an auditor uses negative confirmations several factors must be considered. What are those factors?Answer:The auditor must carefully consider the following:•The effectiveness of the client’s internal controls•Results of substantive tests of transactions•The appropriateness of analytical procedures as evidence on the fairness of accounts receivable.•Whether a large majority of recipients will give careful consideration to the confirmation.Other Objective Answer Format Questions72.mediumMatch seven of the terms (a-k) with the definitions provided below (1-7):a. Accounts receivable balance-related audit objectivesb. Aged trial balancec. Alternative proceduresd. Blank confirmation forme. Cutoff misstatementsf. Evidence planning worksheetg. Negative confirmationh. Positive confirmationi. Realizable value of accounts receivablej. Timing difference in an account receivable confirmationk. Invoice confirmationc 1. The follow-up of a positive confirmation not returned by the debtor with the useof documentation evidence to determine whether the recorded receivable existsand is collectible.h 2. A letter, addressed to the debtor, requesting that the recipient indicate directly onthe letter whether the stated account balance is correct or incorrect and, ifincorrect, by what amount.e 3. Misstatements that take place as a result of current period transactions beingrecorded in a subsequent period, or subsequent period transactions beingrecorded in the current period.f 4. A form used to help the auditor decide whether planned detection risk for tests ofdetails of balances should be low, medium, or high for each balance-related auditobjective.g 5. A letter, addressed to the debtor, requesting a response only if the recipientdisagrees with the amount of the stated account balance.j 6. A reported difference in a confirmation from a debtor that is determined to be atiming difference between the client’s and debtor’s records and therefore not amisstatement.b 7. A listing of the balances in the accounts receivable master file at the balancesheet date broken down according to the amount of time that has passed betweenthe date of sale and the balance sheet date.73. easy a Tests of details of balances must be designed for each balance-related audit objective.a. Trueb. False74. easy a Favorable results from analytical procedures reduce the extent to which the auditor needs to test details of balances.a. Trueb. False。
