Final answer:
An auditor's review of an entity's sales cutoff primarily checks to ensure sales are recorded in the correct period, which can detect overstated sales but may not directly uncover other issues such as unrecorded sales discounts or lapping of receivables. The self-check question's firm's accounting profit is calculated to be $50,000 after deducting expenses from the sales revenue of $1 million.
Step-by-step explanation:
When an auditor reviews an entity's sales cutoff, they are checking for proper recording of sales around the end of the reporting period to ensure that sales are recorded in the correct accounting period. This procedure helps to verify whether there is an overstated sales figure for the year. However, it may not necessarily detect excessive goods returned for credit unless those returns are directly related to the cutoff period. Unrecorded sales discounts and lapping of year-end accounts receivable are issues that can be detected through other audit procedures, but they are not specifically related to the sales cutoff.
As per the self-check question provided: A firm had a sales revenue of $1 million last year, spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. To arrive at the firm's accounting profit, we need to subtract the total expenses from the sales revenue. In this case, it would be $1,000,000 (sales revenue) - $600,000 (labor) - $150,000 (capital) - $200,000 (materials) = $50,000 (accounting profit).Unrecorded sales discounts: If the sales cutoff is not accurately recorded, the auditor may identify unrecorded sales discounts that should have been deducted from revenue.Lapping of year-end accounts receivable: An auditor can review the sales cutoff to detect any irregularities in the timing of recording accounts receivable, which may indicate lapping (the unauthorized application of payments by customers to cover up previous theft).Overstated sales for the year: If the sales cutoff is not properly applied, it may result in including sales that should belong to the following year, leading to an overstatement of sales for the current year.