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auditing ch 10
Terms in this set (54)
Fraud Risk related to revenue recognition:
• Side agreements are arranged
• Channel stuffing
• Related party transactions that require special consideration
• Bill and hold sales
Sales transactions affect the following accounts:
• Trade accounts receivable
• Allowance for uncollectible accounts
• Bad-debt expense
Cash Receipt transactions affect the following accounts:
• Trade accounts receivable
• Cash discount
Sales return and allowance transactions affect the following accounts:
• Sales returns
• Sales allowances
• Trade accounts receivables
Inherent risk assessment=> inherent risk factors affecting the revenue process:
• Industry related factors
• Complexity and contentiousness of revenues issues
• Difficulty auditing transactions and account balances
• Misstatements detected in prior audits
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve:
Write-offs of customer accounts
Which of the following controls is most likely to help ensure that all credit revenue transactions of any entity are recorded?
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
Which of the following internal controls would be most likely to deter the lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger.
Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to:
Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal
If accounts receivable turnover (credit sales/receivables) was 7.1 times in 2011 compared to only 5.6 times in 2012, it is possible that there were:
Fictitious sales in 2012
If the numbers of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?
Which of the following is most likely to be detected by an auditor's review of a client's sales cutoff?
Unrecorded sales for the year.
Negative confirmation of accounts receivable is less effective that positive confirmation of accounts receivable because:
The auditor cannot infer that all nonrespondents have verified their account information.
The negative request form of accounts receivable confirmation is useful particularly when:
Low - Assessed level of control risk relating to receivables
High - The number of small balances
Likely - Consideration by the recipient is
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
No reply to a positive confirmation request is received.
In evaluating the adequacy of the allowance for doubtful accounts, and auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:
Valuation and allocation
Which of the following actions would best conceal the theft of cash collections from sales on account?
Understating the sales journal amounts
To determine whether the client's internal control operated effectively to minimize the likelihood of failing to bill a customer for a shipment of goods, the auditor should begin by selecting a sample of transactions from the population represented by the
Bill of Lading (shipping report) file
Which of the following is not a factor that an auditor would consider when assessing the inherent risk associated with client sales transactions?
The nature of the credit authorization process
Tracing Bills of lading (shipping reports) to sales invoices as a test of controls related to the sales and collection process provides evidence that:
Customers were billed for goods shipped to them
Customers are more likely to complain to the client if which of the following assertions for cash receipts is violated?
Which of the following would not be considered a test in the area of accounts receivable that relates to the existence assertion?
Trace the record of shipping to inclusion in the accounts receivable subsidiary ledger
Which of the following comparisons would be most useful to an auditor in evaluating the overall results of an entity's sales efforts?
Current year sales to current year budgeted sales
An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable is most likely to obtain evidence concerning management's assertions relating to:
Valuation or allocation
Which of the following procedures would an auditor most likely perform related to year-end accounts receivable confirmations when the auditor does not receive replies even after second requests?
Inspect related shipping records and sales invoices documenting the merchandise sold to customers
The negative request form of accounts receivable confirmation is particularly useful when
Number of small account balances is Many; Assessed level of CR related to receivables is Low; Consideration by the recipient is Likely
According to SAB 101, which of the following is not a criteria for revenue recognition?
Cash is received
Which of the following is not a key segregation of duties in the revenue process?
The accounts receivable function should be segregated from the invoice preparation function
Which of the following is the population the auditor is most likely to draw from in order to test the cutoff assertion for revenue?
Which of the following is not a typical procedure performed related to other non-trade receivables
Write-off of receivables from officers against their bonus pay as those arrangements are inappropriate
If tolerable misstatement for the accounts receivable balance is $75,000 and the aggregate known misstatement found by the auditor is $82,000, the auditor is most likely to:
Request that the client adjust its accounts receivable balance by $82,000
Consideration of internal control concepts in an audit
A. Control environment
B. Information & communication system
C. Control activities (recall "SCARE")
D. Risk assessment
Management's philosophy (control consciousness), organizational structure, corporate governance, etc.
Information & communication system
understanding of each of the transaction cycles (recall the "assertions" implicit in the financial statements)
1. Existence -- recorded transactions are valid
2. Completeness -- all transactions recorded
3. Rights & obligations -- any restrictions should be described in proper detail
4. Valuation -- measured appropriately according to GAAP
5. Presentation & disclosure -- fairly presented according to GAAP
Control activities (recall "SCARE")
1. Segregation of duties - authorization (execution); access (custody); accounting (record-keeping)
2. Controls (that is, "physical controls") - especially safeguarding assets
3. Authorization - transactions should be executed as authorized
4. Reviews (that is "performance reviews") - make appropriate comparisons
5. EDP (now IT, that is, "information processing") - involves the adequacy of records and documentation, as well as the flow of information
how risks are identified, prioritized, and managed by senior management
how the company tracks its systems and oversees adequacy of their systems on an on-going basis
Summary of "study & evaluation of I/C"
A. Perform a preliminary review through inspection, observation, & inquiries
B. Document the auditor's understanding of the system varies with the specific circumstances; usually consists of flowcharts, ICQs, or narrative memo's
C. Perform a "walk through" of selected transactions—to verify understanding of system
D. Determine whether reliance on specific controls is feasible and economically justified
Specific transaction cycles
A. Emphasize important documents (they constitute the "audit trail") -- these should be prenumbered & the numerical sequence carefully accounted for
B. Tests of controls often follow departmental boundaries
Emphasize important documents (they constitute the "audit trail")
1. Customer order forms (P.0.s)
2. Sales order forms
3. Shipping documents
4. Sales invoice
5. Customer remittance advice (sequence not relevant)
Tests of controls often follow departmental boundaries
1. Shipping- that all shipments are as authorized and are properly recorded
2. Receiving- that returned goods are actually received & verified before authorizing credit memos to customers
3. Billing- that all invoiced sales have been shipped and that invoices are properly prepared & recorded
4. Accounting- that details are summarized, periodically reconciled, and accurately recorded in the specialized journals and posted to the appropriate subsidiary & general ledger accounts
Revenue/receivables typical internal control objectives
o Goods & services provided in accordance with management's authorization (& based on approved orders)
o Terms of sale (including prices) in accordance with management's authorization
o Credit terms & limits established (as authorized)
o Deliveries of goods & services result in accurate and timely billings
o Sales-related deductions & adjustments (including returns) in accordance with management's authorization
Cash receipts typical internal control objectives
o Access to cash receipts records, A/R records, and billing & shipping records is as authorized
o Detail transaction and account balance records are reconciled with control accounts and bank statements at least monthly
o All cash receipts are correctly recorded in the period received
Revenue/Receipts Cycle: Segregation of duties
a. Separate department decides when "credit" should be authorized
b. Returns are accounted for the an independent clerk in the shipping area
Revenue/Receipts Cycle: Comparisons
a. An "aged trial balance" of A/R is reconciled to the A/R general ledger account
b. Monthly statements are sent to all customers (showing receipts)
c. The sales invoice is matched with its related sales order (customer P.O.) and shipping documents
Revenue/Receipts Cycle: Access (directly or indirectly)
a. Computer passwords limit data entry
b. Cash receipts is handled (recorded & processed) by someone with no access to A/R
Revenue/Receipts Cycle: Records
a. "Key" documents are prenumbered AND the numerical sequence is accounted for (including shipping documents, sales invoices, and "receivers")
b. Access to these documents is limited to authorized personnel
Revenue/Receipts Cycle: Execution (authorization) of transactions
a. Any adjusting journal entries are approved by management
b. The terms of the sale is approved (general or specific authorization)
Cash Receipts (C/R): Segregation of duties
a. An independent person lists cash receipts (and restrictively endorses all checks) when the mail is opened "cash receipts" or "remittance" listing
b. Opening the mail, accounting for the cash receipts (and making the deposit), accounting for A/R, and preparing the bank reconciliation are handled by different employees if possible
Cash Receipts (C/R): Comparisons
a. Receipts are deposited daily
b. Totals from the "remittance listing" is traced to the C/R Journal and to the bank deposit slip (or to the bank statement when available)
c. Bank accounts are reconciled on a timely basis
Cash Receipts (C/R): Access (directly and indirectly)
a. Employees with access to cash are "bonded" (form of insurance)
b. Access to cash (and cash-related records) is limited to authorized personnel
c. Could use a "lockbox" for customers to mail their payments on account
Cash Receipts (C/R): Records
a. Use prenumbered receipts for any cash received "on site"
Cash Receipts (C/R): Execution (authorization) of transactions
a. Any adjusting journal entries are approved by management
b. Bank reconciliations are reviewed by management and approval indicated
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