Advanced Audit Exam 1

(C.) Detecting and Preventing Inventory Theft inventory observation 1

(1) Employee warehouse theft. Key controls- (a) Two factor authentication (password and smartphone) or (best) biometrics to access the warehouse (b) Warehouse personnel *no read AND write access to the perpetual system - Only the warehouse supervisor has write access (ability to change quantities and numbers in the system). - super visor should have Short 'time outs' on his/her PC (c) More than 1 employee in the warehouse at any pount in time and at elast 1 is ethican and keep an eye on unethical employee and post an anonymous tip if they observe theft. Inventory theft can also be detected in perpetual to floor count procedure. This test can predict nonexistent inventory per the perpetuals but also the completeness or risk of theft of inventory. Alternatively, the perpetuals may infact be perfectly accurate, but the items may had been stolen from the floor. Perpetualls are overstated quantity 14. vouched that perp number down to floor to find 10 items. Quantity overstatement of 4 which contributes to overstatement of inventory. Or perp quantity of 10 actual correct number and floor has only 8 then the difference is 2 reflects a compeltenesss assertion risk or theft.

(B.) (Risk Assessment) Detecting Questionable Reporting GL Control and GL Sub-Ledger Analytics (Trend and Vertical Analysis and Stand Alone Ratios)

(1-5) (Trend) Inventory increased at least 10% this year vs. last year w no major changes to firm or ops (a) A/P increased at a substantially lower rate. Much less than 10%. Inv and ap should move in a similar direction. Inventory is always purchased on credit to take advantage of n30 or n10 float.never audit an account as an island. Look at similar accts and movements across those acts. (1-5) (Vertical) Inventory as % of total assets & sales increases compared to prior pds. (1-5) (Vertical) CGS as a % of sales decreases in current yr compared to prior pds. (a) Gross profit % increases dramatically in current yr compared to prior yr. (1-4) (Vertical) Shipping costs as a % of inventory decreases substantially current yr compared to prior pds if I purchased legitimate inventory ive got to physically ship it to a retail location so if this ratio is declining perhaps some of firms inventory is fictitious. (1-4) (Ratios) Inventory turnover* (cogs/avg inv balances) declines à means 'age' of inventory increases. So its taking more days to sell inv perhaps thisis also an indication of fictitious inv since these items may never be sold. PLUS: (1-4) Interview warehouse personnel (a) ask them has 'Anyone instructed you to inflate inventory?' then look for verbal and nonverbal ques.

I. (B.) (Risk Response) Substantive Tests of (Detailed) Transactions. Supporting documentation symptoms (1a)

(1a) *Trace (PRs) à POs àreceiving reports (RRs) à purchase invoices (PIs) à purchases journal à cash disbursements journal (CDJ) and the cancelled check/electronic funds transfer - Utility/phone transactions will only see Pis bc will get bill every month no matter what but . not other sup docs .other services may need rec repots versus other service transactions -- Audit procedure = inspecting supporting documents via tracing. Will result normally from target unsuaual manual jes from previous slides. -- Assertion(s) = *__completeness (SG&A expenses)

(A.) Questionable Reporting Schemes EXAMPLES (Overstated Inventory)

(1a) Consignment goods (owned by another company) (1b) ('Immaterial') Public warehouse overstatement (1c) Lower of cost or market understatement (2) Kiting/*double counting (3) Overstate in-transit items 'owned' (4) Inventory pledged as loan collateral (contributes to (1-3) (5) Change in accounting method (LIFO TO FIFO) (6) Questionable Dr./Cr. combos 1b: inventory may be held here. Normally hold immaterial amts but clients still may be tempted to overstate those amts. First 3 directly relate to physical inventory count at period end (1abc). 2: kiting-not just applied to cash but now to inventory. Double counting-inflating inv balances at locations not subject to auditor physical inspection. Its really important that we conduct our physical counts on a surprise basis today 5: near pd end and not just a 1 time thing but more frequent strategic change near pd end.

(C.) Detecting and Preventing Inventory Theft inventory observation 2

(2) Employee/customer retail theft (a) Showroom inventory 'sensors' (alarm sounds) EX: *WALMART (b) Expensive items up 15 feet EX: Best Buy (c) Bonus (Best Buy) or 401-K (WalMart) incentive employee program. Baseline percentage/ skrinkages is higher than todays percentage a set of bonus checks are issued to best buy and additional Walmart 401k contributions are made. Works effectively - Encourage 'tips' (2) Employee/customer retail theft (cont.) (d) Increasing Sales R&A EX: Customer theft if they steal and return for a cash refund without a receipt—OUCH! A receipt needed for refund. But some bad employees may allow u to return (e) Temp agency, independent of purchasing function and warehousing/retailing, conducts 100% count @ YE. Cycle counts. Temp agencies will likely detect the inventory theft.

(B.) (Risk Response) Detecting Questionable Reporting (1) Inventory Observation (AS 2510) Cont. may still conduct this using:

(a) ('*test counts') *vouch a sample of items from latest perpetuals/sub-ledger to floor and counts ('E') NOTE #1: Conduct on surprise basis using a *smart phone NOTE #2: Resolve differences between our audit counts and the clients initial count immediately! Not enough to identify differences and summarize them on an excel. Have to bring mgt back to that location to conduct another count together and see if they agree that our count is correct and that a legitimate aje is then needed. If leave warehouse or open it back up for bus its ltoo late to determine whose coutn is right. NOTE #3: Count/record every item yourself at a test count or sample location (even 40 ft high à may be empty or brick filled or RFID filled boxes) NOTE #4: If 'scale counts' for numerous lw items, calibrate every few hours. Risk is the default or tear weight on the scale may become more and more positive resulting in overstated acts. •A) use since u may miss some of the overstmts using sampling. Vouching may include some anomalous targeting entries from our mindbridge je scan. Esspecially if they involve inventory purchases near pdend the are likely to have not been sold yet. •Concerns: some subledger items do not exist. And this could be corroborated through voucing down to the physical floor where we may not find all of the related items.

(B.) (Risk Assessment) Detecting Questionable Reporting Journal entry scan (and examining supporting document symptoms) look out for these: bad.

(a) Capitalizing S,G&A(cogs) expenses (Dr. Inventory; Cr. SG&A (cogs) expense). This may reflect a legitimate correcting entry near pdend. But if we see dozens of instances occurring near pdend for virtually material amts, definitely watch out. (b) 'Reversal' JEs ( Dr. Inventory; Cr. CGS). May have recorded a legitimate looking initial je debit ar credit sales and recording matching debit to cogs credit to inv then near pdend when firm realizes its falling short of meeting earnings expectations they may be tempted to make this reversal entry. (c) Overestimating inventory Qs and prices (Dr. Inventory; Cr. A/P; Cr. CGS). Instead of debit inv 100 and credit ap 100 they debit inv 130 (inflating) and ap 100 and cgs 30. ap balance is correct and what matters so u pay vendor correct amt on time. No incentive to record larger ap than whats legitimately owed. Cr cogs to make entry balance. Dr inv cr cogs is not normal its bad. (d) Understated/delayed lower-of-cost-or-market (LCM) write-downs. To detect this type of understmt legitamitely requires a good amt of expertise and does bring in our 1 valuation assertion concern. (e) *No supporting journal entry at all. Part of topside inv/ap entry discussion in ch 11 and 16 recording purchasing process. (f) No supporting documentation may also indicate a fictitous inv purchase just like it did for fictitois sale and revenue process.

(B.) (Risk Response) Detecting Questionable Reporting (1) Inventory Observation (AS 2510) Cont.

(b) (Consignment) non-client name(s) 'stamped' on boxes (a) Client practical example (b) Should be stored/counted separately and remitted to original owners of products. (c) (Public warehouses) 'confirm' (immaterial) Qs stored -Audit technique = confirmation -Assertion = 'E&C' DEFN: Public warehouses (e.g., rental units) operated by third parties that lease space to numerous companies/individuals. Family storing excess goods when basement is full/company warehouse full so using these rental units for overflow pruposes. NOTE: AS 2510 only requires 'material' inventory balance observations; so, if no observation at immaterial locations that may reach amterail if they don't check here & no confirmation à risk of overstatement* d) Lower-of-cost-or-market write-down -- Obsolete/damaged inventory per dust/dents AND not in 'normal' location ('V') (AS 1210*) -- Understate: Dr. Obsolete Inventory Expense Cr. Allowance for Obsolete Inventory

NOTE: 'document flows' and related segregation of duties in F11-1 (p. 402-403) AND supporting documents

- Fundamental concern is weak segregation of duties AND unauthorized purchasing program changes

l(2) Accommodating/obligating

-"I sometimes (or frequently) sacrifice my own wishes for the wishes of other persons." -"I try not to hurt others' feelings" -"If it makes other people happy, I might let them maintain their views" -"If the other person's position seems very important to him/her, I will try to meet his/her wishes" Opposite of competing. Ppl pleasers. Accepting oral reps from auth mgt w/o exceptions even if there is strong likelihood of material mistatement/. A cfo may bemore likely to accept a ceos request asa team player to approve fictitious rev transactions. Competitors may exploit the accommodator and may lose respect for them. Need to stand up ton competitor.

l(1) Competing/questioning

-"I try to win my position" -"I press to get my points made" -"I try to show the other person the logic and benefits of my position" most positive of the 3. highly effective approach if the opponent is a cpa and a highly rational ;ogical thinker Sarcasm and threats that may damage client relationships. Don't u agree. If u don't do this ill resign. May not be others oriented or the best listeners. May have a sound basis for highly judgmental basis so we should listen to them. They win, other side loses. And client may get mad and less than optimal results may come. Conflict mode words. A questionable individual is highly professionally skeptical and most effective at detecting fraud but may be overly critical of managements oral explanations for analytical fluctuations and thus request an excessive amt of supporting docs for mgmt. assertions. Find sweet spot between these 2 extremes in our client interactions.

I. (B.) (Risk Response) Substantive Tests of (Detailed) Transactions. lSupporting documentation symptoms: (2)

-(2) Purchase Cut-Off (*last pre#d RR) to know purchases of current and past pd. l(a) Audit procedures = inspection via vouching and tracing l(b) Assertions = EC lFor the last week of current year and first week of next year, assess proper 'timing' -(Vouch) purchases journal à PIs à RRs à POs à PRs (for overstated small assets such as inventory, Chp 13). Targeted right near pdend. - -(Trace) PRs à POs à RRs à PIs à Purchases Journal (for understated SG&A expenses). Usually involves targed unusual manual jes from our 100% je scan.

lI. Initial Sales Transactions (Chp 10)

-(A.) (Risk Assess.) *Analytic procedures lNOTE: GL control/sub-ledger symptoms à journal entry symptoms à (B.) look at key supporting documentation for symptoms -(B.) (Risk Response) Substantive tests of (detailed) transactions lVouching and Sales cut-off l(NEW) Related party transactions: could be ,mat to FSs and could include mat misstatement -(C.) (Risk Response) *Tests of ending account balances -(D.) II. (Risk Response) Subsequent cash collections (Chp 16 portion) lTests of ending account balances. Cash confirms to all banking relationships. lNOTE: Cash skimming (brief)

lStep 4: (How to) 'allocate' the (total) transaction price to the performance obligations in the contract

-(Estimated) 'Stand alone' selling prices

I. (A.) (Risk Assessment) Analytical Review Procedures. l(1) GL Control/Sub-Ledger Symptoms (vertical & trend analysis):

-(Vertical) Assume SG&A expenses as a % of sales decreased this year substantially so compared to the prior yr. we may have heightened risk of mat misstmtt. -(Trend) Assume SG&A expenses (small asset purchases. Typically purchased on acct/ credit so debits should move in similar rate as ap or there may be problem w one or bothcats of accts) decreased by 10+% this year AND related A/P decreased at a substantially DIFFERENT rate l*Compare final month's SG&A expenses this year to final month's SG&A expenses last year (EY Helix) lCompare amounts owed to the most active/material vendors last year versus this year (LATER) l l

(C.) (Risk Response) Tests of (Ending) Balances for A/R and Sales. l(1) (Exhibit 10-4) A/R 'Aging' Schedule

-(a) Audit technique = analytical, inquiry -(b) Assertion(s) = _valuation (net realizable val - amt client ultimately expects to collect from customer) and existence (more at risk if ar bal is completely fictitious. Completeness is less important0______________

lStep 2: Identify the 'performance obligations' in the contract

-(a) Identify promised goods and services -(b) What promised goods and services are 'distinct' distinctly identify two or more performance obligations lEXs (3) -Sale of retail goods w deliver and install seperately -Selling food or drinks w loyalty program. Seling of intangible good and loyalty revenue subscription Raw materials separate is not an ex but selling the finished goods separately is an ex.

(D.) (Risk Response) Test of (Ending) Balances for Cash. l(2) Dec. 31 cash confirmations (inflated balances)

-(a) To hide failing company financial condition (including relieving fictitious A/R) lDr. Cash (fictitious); Cr. A/R (fictitious) lEX#1: Parmalat ($4.9B) lEX#2: Satyam (India) Enron Fraud ($1B) -(b) PLUS: To hide (investing client) cash theft l*(Peregrine Financial Group) PFGBest ($200 million) -(PFGBest $200mm Cash Fraud) Video (3 min) https://wakeforestbusiness.knowmia.com/cATr -(a)&(b) More difficult if confirmation.com used l2 sets of books. If on paper its less obvious. Easier to catch w confirmation.com. Clarity and transparency. Find out which banks arnt using confirm dot com bc those are gonna be the only ones u can hide fraud. •Primary concern for cash confirms is overstatement or inflation and it can hide a comps true fin condition and can be used to relieve fictitious ar balances. •Firms like to dimply record that entry bulleted. This occurred w Parmalat. Bogus cash balance not kiting scheme. Satyam same type of jes. -Q: Why is it so critical to utilize confirmation.com for cash confirmations AND to consider preparing a bank transfer schedule (for high risk clients)? To reduce the risk of inflated, bogus cash balances that are not detected à stream of subsequent 'cash receipts' that can 'relieve' fictitious A/R (Dr. Cash; Cr. A/R)*: EX: a $20mm cash balance à $30mm; this $10mm in inflated balances used to relieve $10mm in fictitious A/R through a series of otherwise perfectly gaap using debits and credits. QUOTE (Barry Minkow): How can you dispute an A/R if it has been 'paid' Without this fictitious ar balance in pd 1, in pd 2 then starts to deteriorate the ar aging dramatically and thered be a growing disconnect between initial credit sales and subsequent cash receipts. Also dramatic reductions in accrual based ni will occur in year 2 as we may have to resort to increasing debits to bde or debits to sra to get those fictitious ar balances off the books. -FACTS l(1) You are responsible for auditing a major German online credit card (FinTech) payment (consumer/vendor) processing firm (a competitor to PayPal) during spring 2018 and 2019; their primary source of revenue is transaction fees charged to transfer funds between online buyers and sellers when goods and services are exchanged; in spring 2018, your client's market cap exceeded that of Deutsche Bank, Germany's largest financial institution. l(2) Manual cash confirmations (with material balances) were sent to all Philippine bank 'trustees' and returned with an illegible respondent's signature without exception in 2018 and 2019. (a) The material escrow cash account statements (obtained from the client) in January 2018 and 2019 showed no detailed deposits or withdrawals into or out of the accounts. l(3) Samples of sales supporting transaction fee logs near period-end in December 2017 and 2018 (cut-off testing) identified numerous transactions with the exact same date and time stamp; similar clustering of transactions near period end in December 2016 with the same date and time stamp did not appear to exist. -(a) Unlike spring 2018, supporting sales transaction fee logs were not available until very late in the spring 2019 audit; management indicated that accounting staff head counts had not kept up with skyrocketing sales in 2018; also, the logs were electronic copies (that were difficult to link back to the AIS) in late spring 2019 l(4) Transaction profit margins increased substantially in 2018 compared to prior periods and industry averages l(5) The firm refused to break down transaction volume by each (different) type of business ('segment reporting'). -What 'red flags' (if any) for questionable reporting may be apparent from the preceding evidence? What audit procedures could have been performed to 'respond' to these 'red flags'? Amounts on the confrimatons were material and occurring in clusters at pdend. There were no transaction logs provided at least until the very end of the audit in the spring. This should've been detected earlier and auditors should have requested logs earlier. Massive predating scheme in spring 2018 and spring 2019. moving sales from these dates to dec 2017 and dec 2018 stopping electric time dating processing. And in late 2018 part of 2019 audit, firm recorded a lot of fictitois sales bc they had to keep rev growing at a phenomenal pace. Wiretech. Auditors didn't catch it bc manual confirms were sent out w illegible signatures. Shouldve pushed harder for confirm dot com automated signatures to know exactly who to reach out by. Income will collapse in next period if u record legitimate bde. To fix, create a fictitious cash balane to use to relieve the fictitious ar balance. Answer in pics. -PCAOB AS 2310 ('The Confirmation Process'), par 27: lIf information about the respondent's competence, knowledge, motivation, ability, or willingness to respond, or about the respondent's objectivity and freedom from bias with respect to the audited entity *comes to the auditor's attention, the auditor should consider the effects of such information on designing the confirmation request and evaluating the results, including determining whether other procedures are necessary. All new language. If confirm.com is used we can gather information

lStep 5: Recognize revenue when (or as) the entity satisfies a performance obligation

-*Transfers the promised 'distinct' goods and/or services (Step 2) and related 'control' to the customer; satisfied at a point in time OR over time (e.g., % of completion w construction or unearned revenue à revenue) Fob shipping point

l(2b) Confirmation of A/P (cont.)

-- Send 'blank' form @ 12/31 -- Vendor should know precisely its A/R balances and fill in right balance -- Confirm if vendor has any N/P AND whether client is holding any (non-owned) 'consignment' inventory (Chp 13) for vendor w client. Danger may be that the client is counting that consignment inventory as its own inventory to overstate its 1231 inv bal and overstate assets and earnings.

(B.) (Risk Response) Detecting Questionable Reporting (3) Overstate in-transit items 'owned'

-- Sudden switch from FOB destination to shipping point purchases (per GJ 'memo' AND supporting document scan) in violation of policy. Critical that u get a copy of those written acc policy

(B.) (Risk Response) Detecting Questionable Reporting (1) Inventory Observation (AS 2510 -- Table 13-8)

-Audit technique = physical examination -Assertions = 'E(R)&V' -NOTE#1: *No inventory can move in/out during count NOTE#2: If control risk is 'high,' 100% YE count and 'cycle cou

(D.) (Risk Response) Test of (Ending) Balances for Cash. l(1) (high risk) prepare a 'bank transfer (kiting) schedule' (Exhibit 16-6)

-Audit technique = reconciliation Auditor prepares this if concerned that theres a falsely inflated 12/31 balance. Do this by double counting cash within two or more accounts so leave it in disbursing acct and show it as a deposit in transit in the receiving account. Looking at the client's book balances exclusively looking for where the disbursing acct date is early in the next act and the rec clients books date is just before pd end. 1st 3 have no concerns so only recorded as ded from rec acct. 5 and 6 only recorded in next period so theyre good. 4 is the issue. Classic double counting or kiting scheme. Left in disbursing after been recorded/rec.

l(2b) Confirmation of A/P (cont.) -- Q2: Why send confirms to last year's 'most active' suppliers even if this year's A/P balances are very small? -- NOTE: key Alternative procedure if we don't get ap confirm back = look at subsequent cash payments. 1k ap bal, 990 cash pmt seems legit.

-Could still be an extremely 'active' supplier this year à so this yrs ap bal is materialy understated. -So last yr the supplier had a 1231 ap bal of 5mil and at end of curr pd bal is just 10k. It is possible that that 10k bal should still be 5mil as of this yr. send confirms to most active suppliers of prior yr may help detect mat understmt

(B.) (Risk Response) Detecting Questionable Reporting (2) *(Kiting) prepare a 'transfer schedule' (see Exhibit 16-5)

-DEFN: Goods in transit between location #1 and #2 @ YE, but left on the books of location #1 - (a) Audit technique = reconciliation - (b) Assertions = EC Double counting. Hopefully no advanced curtesy. Do on advanced basis.

lStep 3: Determine the (total) 'transaction price'

-DEFN: the total amount of consideration to which an entity 'expects' to be entitled in exchange for transferring promised goods or services lMay be FIXED or include upfront 'variable consideration' ESTIMATES such as: -EX: Net (not gross) method for sales discounts (1/10) and sales R&A; reserves (for cancellations or product loyalty programs); expected *interest revenue (post n/30)

lRemember the 'document flows' AND related departmental responsibilities (p. 344-346).

-Fundamental concerns are weak segregation of duties (network access controls) AND unauthorized sales program changes (management override w/ CIO to change underlying code to inflate sales near period end)

risk assessment analytical review procedures GL control/sub-ledger symptoms: l(3) Stand alone ratios

-IN-CLASS Mini-Case #2C: A/R turnover decreases and average days to collect A/R increases may indicate what? 2c: increasing problems w collecting receivables on time. Economy is not doing well. Could happen w overstating receivables aka fictitious sales and fictitious ar. Could slow down collection of receivables. Consignment sales, lazy bill and hold, channel stuffing could also do this. Ar going down (being converted into cash in a long pd). Want to turnover more. Economy is prob not doing well. Credit policies or collection procedures should be a lil more relaxed and foregiving on back end. Worst case scenario: could cause ar turnover to be lower and a lot longer compared to last yr. Overstate receivables (fictitious sales) nr will never be collected. Slow down collection of receivabees: bil n hold, chanel stuf, consignment sls, nr not being converted into cash and beign turned over.

mini case numebr 1 internal control weaknesses: describe the internal control weaknesses relating to purchases of and payments for special orders of kida company for the purchasing,re ceivng, ap, and treasurer functions

-Initial order or request should be in writing -"prepares" which means authorization or approval is not present. Did dept head review it for appropriateness w signature since that's not present that's a weakness -Have vendor catalog but should have pre approved vendor list/vendor master file for smaller purchases. Use competitor bidding for larger purchases. On time delivery -Purchasing dept should not have sole authority for approving a vendor or replacing or adding one. Some vendors may be tempted to bribe purchasing dept if u do this. And purch mgrs may add dummy vendors amd send checks to their bank accts. Have critical control over decisions around vendor master file. Fresh eyes of corp accounting to make sure theyre legit businesses and purchasing is not committing fraud. -Dept head is requesting income. Theres no sig and they need a sig to verify it's a dept head. If no sig send requisition back and ask for sig for approval. Purch should determine if purch is within purch budget for that dept. don't exceed preapproved budget limits cause that could cause cost overruns -Equal interest on product deliver and price -Show if there are any discounts avail or taken -Receiving should communicate through receiving report supporting doc not just oral communication. And they should be done in a secure way not just on the phone. Not most effective or efficient either. Use vpn instead bc its encrypted between 2 parties bc its sensitive info. -Don't check monthly check open file once a week or twice or so faster -Copy from purchasing. Need to know that order has ofccurred and they should expect a shipment in next 24hrs. Shouldn't be duplicating electronically and sending to multiple parties of interest. Worse In a manual environment. Purch order received by receiving shouldn't include the quantity ordered bc then they might just say theres 100 items instead of checking. -Has to be a warehouse attached to receiving function cause u needa store inventory. -Receiving should do a careful count of the quantity and should let someone ele compare the quantiy order and make sure we got what we requested. Receiving should check for damaged or defected items during shipment or maybe even during production -Bus to bus u have days to send back damaged items -Should include written receiving report for 3 way quantity match and pricing data to make sure price amt agreed upon is actually there -Debit equipment credit ap. Corp acc should review these entries for reasonableness -Check should be preformed not prepared. Pro forming means u include the payee, $ amt, but not the sig bc treasury or cashier function should be signing the checks. -File paid invoice by purchase invoice number bc don't want same vendor to subsequently issue the same invoice another time and try to double bill me for same good. Key control that should be ther ein every purch process: any invoice that comes in, initially automatically routed through the paid purch invoice file to see if tht prenumber matches a previously paid prenumber if so that current pruch invoice is kicked out and investigated so don't pay for it a second time ask vendor what sup -Treasury have control of checks and another freshset of eyes on check and other supporting docs should be prenumbered and multipe copies of everything except perhaps check. But all docs should be prenumbered. Need prenumbered transaction ID or theyre wil be a break in sequce. Bad and fraud.

(COVID Update*)Lease Revenue Recognition & Measurement Overstatement Risk lMany lessors and lessees are in financial distress

-Lessors = REITs* and Boeing -Lessees - retailers, restaurants, hospitality (including hotels) and airlines* in financial distress. Their cf might be declining and might be tempted to overstate current and or expected lease concessions to understate material sg&a lease exp. lhttps://wakeforestbusiness.knowmia.com/UeK2 (0:00-1:26) LA Restaurants . lhttps://wakeforestbusiness.knowmia.com/EcHO (0:00-1:51) REIT CEO*

lQUESTION: Is a competing/questioning, accommodating/obligating and avoiding approach often BAD and a collaborating approach almost always GOOD in attempting to resolve conflict?

-NO; it depends on the SITUATION. If a likely material gaap issue has a clear fasb or more likely firm acc policy guidance such as avoiding sales cutoff by engaging in predating scheme (time stamp frozen) its acceptable to be competitive and assertive. Less sarcasm and threats to keep client unless theyre unethical. Empathetic convo w client to solve. Material w/o guidance (exs in vid) collab approach best. Seek leverage points. Rewatch for pressures exs. Accommodating may be a good approach when allowed to use more aggressive approach if in footnotes. Avoiding approp when delegating to junior staff. Good for temporary w not ready to share w client.

(B.) (Risk Response) Detecting Questionable Reporting (5) (Accounting method) ensure 'consistent' application since changes must be disclosed in 4th paragraph and footnotes in a hopefully otherwise uneuql accounting report.

-NOTE: LIFO to FIFO increases inventory (and equity) and decreases CGS (and increases NI) -

What are 2 or 3 examples of earnings management applied to revenue (to meet quarterly/annual forecasted EPS)?

-NOTE: These 'examples' will result in a muted 'risk response': l1. more liberal credit policies especially during a recession. 2020, some firms and hospitality are desperately tring to keep sales as they were before covid. W relaxing credit policies the challenge is in next pd there will be large increase in bad debt exps l2. mdoest increase in sales discounts. Channel stuffing - near pd end l3. legit acceleration of work on lt construction projects resulting in legit increase in percentage of completion of that project and increase in revenue therefore. l4. 1 time shift form lifo to fifo inv accounting Another risk in recession: big bath - results in overstatement of ar allow for bad debts. Is it em or intend to deceive.

lThe most common accounts manipulated when perpetrating financial statement fraud are revenues and/or receivables.

-SEC Accounting and Auditing Enforcement Actions (mid '17-' mid '19): 35.8% of all fraudulent financial reporting involves revenue and/or accounts receivable accounts. l21.5% of all SEC Accounting and Auditing enforcement actions involve revenue and/or accounts receivable accounts. By far the most common area of mat frauds occurring.

l7 course 'processes' (Figure 10-1, p. 336)

-Sales (Chp 10&16 portion) -Purchasing (Chp 11&16 portion) -Payroll (Chp 12) -Inventory (Chp 13) -PP&E/Intangibles (Chp 14) and L-T N/R -Investments (Chp 16 portion) -L-T Debt and Stockholder's Equity (Chp 15) - ;owest risk acct in bs/is

risk assessment analytical review procedures GL control/sub-ledger symptoms: (5) Regression (new pending course)

-To 'predict' unaudited sales (and analyze variances)

lNOTE: Our focus = PERCV assertion (vs. intuitive (text) assertions like 'accuracy' . Tells us not nature of inaccuracy/overstatement or understatement but does if its an error)

-Why? Public accounting and the CPA exam use 'PERCV' (as well as 'COVERU') -(P) Presentation/classification and disclosure (notes): is an acct correctly classified on bs/is. Disclosure in footnotes or md&a for 10ks. -(E) Existence/occurrence or overstatemen (validity)t: overstmt of assets and rev -(R) Rights or ownership of especially assets: right to owner or should asset rly exist on bs -(C) Completeness or understatement: exps and liabs understatements. -(V) Valuation (per unit price or 'value')* : preetmterprises are valued. Focuses on prices and not quantity. If current [rice of security reflected in financials. Is net real val of ar and lcm appropriately reflected in financials. Is the net ppe asset val or orig cost or price - accum depr to date aprop reflected in fin 'COVERU': C=completeness; O=cutoff*; V=valuation; E=existence; R=rights; U (vs. P)=understanding per notes/classification

Brief Review (Revenue Recognition & Measurement) lStep 1: Identify the 'contract(s)' with a customer

-Written or *oral signatures = an 'approved' contract; *payment terms; *collectability is probable per each contract/invoice;* commercial substance (sellers cfs are expected to change as a result of a sale of goods or services since in part we expect collection to be probable)* Oral contract can be considered a valid contract 1231. agreement between customer and cfo emails = written contract required if near pd end. Bc there is a risk that if they oral signed they could not be intended to be followed thru.

l(Further) Identification of Segregation of Duties Conflicts -Q2 (TOUGH): (In contrast to 'traditional' data types), what is an 'ideal' data type(s) to assess segregation of duties risk?

100% access log review. Going into access log that tells us every time an individual from the credit dept, billing, etc accesses the erp network and what portion of network they accessed. Firms are developing software that embeds and has learned through machine learning what are the firms specific policies regarding segregation of duties. And have any of those depts violdated the core firms seg duties concerns which will produce an alert for auditors and a summary of exceptions throughout the year and see if tehres sesetemic violations or not. over 12mo pd and see what datas accessed, admin access feature so many ppl having admin access speeds up recording and approving for company especially if some1 is sick. Other option: Use join feature in tableau or click to joing two or more databases together and compare them side by side. Unauth/unapproved programmed code changes for rev process from this year to last year being compared and see if theres any lines that are new or deleted or a change within an existing line. When this yrs code changes and no new system installled, business as usual no big acquisitions, u should be able to see documentation of all those changes. Appropriate mgt approval of those program coding changes or question it cause that may be fraud to boost rev fictitous rev predating scheme w help of cio. Ina high risk engage ment u should highly consider having cio sign a doc that says that that individual did not acquies to program code changes. This is important for them and us to sing and if they wont than its obvious fradud for high risk engagement and will have to work harder to get comfy w whats going on. Admin access means a supervisor in company has ability to record their own entry and approve their own entry. No custody of related inventory but this is an opp to create fraud. Should reduce percentage of employees w admin access so they don't do fraud near pd end to boost rev or lower exps to achieve those dept bonus targets. So many ppl get admin access bc it speeds up the review process and perhaps the initial recordoing process. If someones out sick or on vacatin someone else w access can do it so no delays. Pd end numbers don't matter just annual numbers not quarters. For private. So near pd end that doesn't really carry a lot of weigjt A2 ideal: a) access log review - all relevant erp processes - trian AI software to summarize violations of firm policies (100%, not sampling) such as comingling of custody, recordkeeping, and approval/reconciliation b) Join feature (qlik) to compare program, code line by line this yr v last yr assuming no new system installs.

(D.) (Risk Response) Test of (Ending) Balances for Cash audtomating the confirmation process

125k ppl using. 850k audit clients etc Top 20 largest us banks wont use paper confirms bc likelihood of fraud. Parties: auditors, their client, and most importantly the 3rd party respondent. Key benefits of electronic confirmations vs manual confirms: security, centralized processing, and speed. Security: authorizing within confirms network who is going to be the approp respondent. 1st backgfround check of bank customer etc to validate they are a legitimate bus or 3rd party and not a shell or dba customer setup by client mgtm to impersonate a bus or individual to return confirms w inflated fake balances confirms. And w rly no means to identify the individual respndant and ask thenm any Qs. Similar process also required for all new auditors and cleints requesting access to this proproititoyy network. Ex: bank is to be authorized as a new user of this system. The auditor prepares a cash confirm and sends It electronically to the client for their digital authorization signature that must match a legitimate sample signature to eliminate forgeries. Additional critical 3rd party respondent controls are for ex elec confirms are sent via an encrypted vpn to a group of approved respondent computer ip addresses within this authorized approved bank. The respondent or one of the respondants then completes the confirmation including noting any exceptions when compared to the clients balance, returns it to the auditor electronically. The specific respondents ip address or digital signature world company electronic responds and the auditor has and Qs concerning the veracity of the balance they know exactly who to follow up w. now if a client mgt attempts to bribe the legitimate bank confirmation respondent to return a fictitious balance w no exceptions like paramont respondent may be held personally liablie if fraud is detected. Confirmation.com will show all activity perfomed by this individual and make it available to investigators. Confirm dot com goes through periodic domestic soc 1,2,and3 examinations consistent w the aicpa trustee criteria and international iso 27001 examinations to ensure that their network of security as well as system availability and other controls are of extreme high qual as discussed in the ais or erm class. Central location and control is also greatly enhanced. Important even if manual confirms are sent out. The cpas network can send and receive all types of electronic confirms summarize their results in whats called a 6 part firm wide confirmation dashboard and a 6 part subledger for each client called a 6 part client profile. Speed: fewer audit hours at perhaps a lower cost. Most audit confirms are returned within 24-48hrs. Huge improvement.

l(3) Q: How do you deal with a private entity controller who is using an 'accommodating' and then 'avoiding' approach when discussing critical MWs that need to be corrected? (in other words, this means that they agree in the 'closing conference' to correct all of the weaknesses that we have identified in our audit; but, after we leave, they 'avoid' actually implementing any of our recommendations to mitigate these weaknesses (over the next 12 months)? l(4) (TRUE STORY) As a fairly new associate, you have been scheduled by different seniors to work on 5 different clients in one week; one senior implied that 10 hours would likely complete the requested task (when 40 hours turned out to be more accurate); this former MSA student who was an accommodator and an avoider waited too late to ask each senior how 'urgent' their work was for the coming week; instead, they simply said YES to all 5 senior's requests. And some coulda been done next week they weren't strict on due dates and ended up workimg 100hrs in one week

3: 1 response may be to Coopoerate with the document that sets specific milestones each qtrfor an implementation of an enhanced set of process controls and have controller sign off on document. If audit committee is behind in implementing the control recs, the committee chair can put pressure on the controller to complyso that when they come back for next yrs audit material weakenss has ben effectively resolved

risk assessment analytical review procedures GL control/sub-ledger symptoms: l(4) Industry & internal client 'reasonableness' (expectation) tests using operating data

4 - reasonableness tests w operating data expectation. Client wont expect this so data will likely not be corrupted.

lThe primary evidence regarding year-end bank balances is documented in the: -A. Standard bank confirmations -B. Outstanding check listing. Inside outside info -C. Interbank transfer schedule inside info -D. Bank deposit lead schedule more pure inside info

A. We hope that's the most likely pure, objective free from bias persuasive evidence that I can gather as relates to ye cash bank balances.

II. RFID Tags and Advanced QR Codes (brief)

Audit benefits (1)Specific ID à more accurate and timely write-down AJEs -- *through use of QR (gerater storage and processing capabilities for costing inventory-qould know exact price and item. List of items at certain number of goods marked down) codes and RFID tags. Risks for qr codes: recreated fraudulently. They are unencrypted and unsecure. (2) Physical inventory count efficiencies -- RFID tags* provide wrlcome efficiencies for phys inv counts. Low grade radio frequency thru boxes using smartphones so suppes fast.

l(1) Auditing standards recognize the auditor's 'dual responsibility' to detect material misstatements AND to ensure their appropriate resolution.* l(2) Audit partners indicate that CFOs may try to circumvent a partners' authority by negotiating directly with audit seniors -Q: How do you respond to a CFO who with emotion and assertiveness (competitiveness) contends that they have worked in an industry for 25 years, and that they know all of the alternative accounting treatments and when best to apply each, backwards and forwards; now, how can you claim to be a greater expert than they are?

Audit doestnt focus on approp resolution as much but they should More leniate terms. Only offer to partners not staff when they should

lOn receiving the cutoff bank statement, the auditor should vouch: -A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal -B. Checks dated before year-end listed as outstanding on the year-end bank reconciliation (and see if in fact they're clearing) to the cutoff statement. -C. Deposits listed on the cutoff statement to deposits in the cash receipts journal. D. Checks dated after year-end to outstanding checks listed on the year-end bank reconciliation and to the cutoff statement

B. Checks dated before year-end listed as outstanding on the year-end bank reconciliation (and see if in fact they're clearing) to the cutoff statement.

lIn evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: -A. Existence -B. Valuation -C. Completeness -D. Rights (and Obligations)

C less important but b is best answer net real value most likely concern potential for understmt for deb to bde and creds to allowance account or aje at pd end a is secod bess fictitious ar less common answer

6 part client profile

Client signers that can approve conrirms = client authorization. Accounta avtive = accounts Client profile=actual sigs that must match Paper confirms can also be sent out by the same network but security around these manual confirms is not as strong. 1/3 of banks have not signed onto confirm.com still. Where fraudsters go and a red flag for auditor if they don't use confirm.com for high risk engagements.

lPreferences of senior managers (including CFOs) vs. audit partners (vs. audit associates)

Compromising driven more by ceos and cfos. Avoiding accommodating competing collaborating compromising. Auditor prefs and cfo prefs.

l(1) GL Control/Sub-ledger Symptoms (vertical analysis): lIN-CLASS Mini-Case #2A: Q: What (if any) unusual GL control/sub-ledger symptoms exist 'below'?

Downward trend across years for both ap and ae. Normally, current liab accts should be fairly constant each yr, or go up and down depending on timing of pmts and checks but it should def not be a constant downward trend unless business is declining or sales are declining also. Purchases of sga and inventory declining that are highly correlated to changes in current liabs. Prolly have understatement of these current liab accts on purpose.

Inventory Observation (AS 2510) Cont. (d) Lower-of-cost-or-market write-down -- Mini-Case #1: Q: What (if any) physical signs of obsolescence are evident in these two pictures?

Dust, boxes stacked on each other, shoes outside of the boxes, stuff in front of the boxes, Inventory Observation (AS 2510) Cont. (d) Lower-of-cost-or-market write-down -- COVID UPDATE -- Apparel industry (hard hit)* ensure lower cost of mkt ajes are not understated

(B.) (Risk Response) Detecting Questionable Reporting 4*(Pledged inventory) = 'red flag' by definition.

High risk for questionable recording. The temptation is to overstate inventory to obtain a larger bank loan that u would not otherwise qualify for in a desperate attempt to cover only core operating needs. So its not being used to expand the business. Its being used to just keep the bus alive for a few more qtrs. The business is often burning through cash big time. Ex: jcpenney. Overstmt of inventory through pledged inventort than loan they didn't qual for (a/r hr) then blew threw cash and had to file for bankruptcy.

lI. (Initial) Purchase Transactions

I. (Initial) Purchase Transactions -Understatement or 'C' concerns for SG&A expenses and overstatement or 'E' concerns for *small assets l(A.) (Risk Assess.) Analytic procedures -NOTE: GL control/sub-ledger symptoms à journal entry symptoms à (B.) supporting documentation symptoms l(B.) (Risk Response) Substantive tests of transactions l(C.) (Risk Response) Tests of (ending) account balances (KPMG Short Case #2) II. (Risk Response) Subsequent cash *disbursements -See cash confirmation testing (Chp 10/16)

I. Inventory Purchase Transactions ('E') and overview

I. Inventory Purchase Transactions ('E') •(A.) Questionable reporting schemes • •(B.) Detecting questionable reporting -(1) (Risk Assessment) »GL control and GL sub-ledger analytics »JE and supporting doc symptoms -(2) (Risk Response) Inventory Observation and Other •(C.) Detecting and preventing inventory theft II. QR code and RFID tag audit benefits

l(Further) Identification of Segregation of Duties Conflicts -Q3: What are potential 'value added' insights (that may be evident when addressing Q1 & Q2)?

Indentigy where theres admin access Detect additional fraud info for increased admin access Human cap deficiencies: understaffing that may lead to fatigue, lack of being sharp, missing probs in system, may legitamitely reduce rev in company Unexpected effects of trying to cut costs A3 value added: A1: previously non detected fraud exposure. Increased op for inappropriate recording detecting admin access even if not yet acted upon. Detect fraud exposure A2: human cap deficiencies (previously unknown understaffing that may reduce rev or fraud -> lost rev or fraud) may lead to fatigue and missing probkems. Salary exp they were tring to save was much less than the rev they lost from understaffing.

risk assessment analytical review procedures (1) GL control/sub-ledger symptoms (trend analysis): lIN-CLASS Mini-Case #2A: Does the visual 'below' (gross margin by customer name), suggest substantial gross margin risks (or not) and why?

Inherent risk already assessed and control risk already assessed then do this. Now look at data analytic capabilities to fina;;y arrive at initial assessment Red stop yellow warning green keep on goin. Doesn't appear to be way out of line for gross margins but one 64 is more of an outlier than the others. Gaps/ no data available = no goods purchased. Trend analysis! 64%

Periodic Payroll JEs: JE #1

JE#1 (to record 'gross' hourly wages/monthly salaries) Dr. (Gross/TOTAL) Wages/Salaries Expense Cr. FICA Payable (6.2%; 1.45%) Cr. Federal Income Tax Payable Cr. State Income Tax Payable (applies in all states except a few) Cr. Pension (401k) Payable (voluntary wh) Cr. Health Plan Payable (50% of total cost, 50 covered by employee) Cr. Cash (or Net Pay) ('E')* e is a big deal bc theres a built in control for the completeness assertion here. If an employees take home pay is too low (not complete), they will immediately complain to hr or their boss. If their takehome pay is too high, the existence assertion is affected they may or may not complain. Unlike all other sga exps discussed previously, payroll is the only one that has an element of existence that is a key concern ASIDE: Q: What are your top objectives for life? A: (1940) (#1) A strong family, (#2) a solid job, (#3) a strong faith A: (2010) (#1) wealth, (#2) status, (#3) success (and 'inner peace' was a distant #4) Heres the big 3 periodic discrete time pd JEs. Withholdings that get us to final takehome pay/final credit to cash: all the credits/ fica is 6.2 wh future retirement ss income, medicare 1.45 hospital and other healthcare cost +65 Middle age baby boomer agreers

periodic payroll JEs: #2

JE#2 (additional employer payroll tax expenses) Dr. Payroll Tax Expense Cr. FICA Payable (100% required match) Cr. FUTA Payable (6% on first $7,000) Cr. SUTA Payable (*1-6% on first $9,000max) Cr. Pension (401k) Payable (100% match by employer) Cr. Health Plan Payable (50% of total cost-employer portion) Cr. Vacation and Sick Pay Payable NOTE: also accrual entries (JE #1 and #2) near period end JE #3 (next period) Dr. (Numerous)debit to Payables (per JE #s 1-2) ('C') Cr. Cash ('C') •Pay nice wage in entry 1 but more in entry 2. additional 20-25%. ] • •Completeness now bc it is possible that one or more of these payables has been understated or not recorded at all in je 1 or 2 leading to an understatement of the subsequent cash pmt in je 3. alternatively, all the payables in entries 1 and 2 may have been completely recorded but the subsequent cash pmt may be understated . Hpp recorded by employee and employer but the moneys eearmarked to pay the hc plane provider may have been stolen and an entry may have been made in order to hide this by debiting bde (mindbridge fraud risk factor) and crediting cash.

l (Further) Identification of Segregation of Duties Conflicts -Q1: What 'traditional' data type(s) are used in assessing segregation of duties risk? That creates an op for cooking the books and getting away w it

Looking for dif key departments that have distinct separate capabilities and duties. Separate approval of credit, reconciliation fo cash duties within departments (custody, record keeping, approval/reconciliation) cant combine these 2 or more of these 3 or theres an increased opportunity for foul play. duties: approval of credit, approval of sales invoices or bills, reconciliation of cash through a bank reconciliation. A: (traditional). A-process 'walkthroughts' -> flowcharts. B- internal control narratives (ch 11) Data types: flow charts or procedures we wanna perform to get comfy w segregation of duties and supporting internal control narratives. Flowchart to visualize whats going on and some narrative description across each of the departments, what their responsibilities are.

What are 2 or 3 examples of earnings management applied to expenses (to meet quarterly/annual forecasted EPS)?

Normally immaterial adjutments increase eps by 1-3 pennies push ourselves over the finish line Answer: may involve a legitimate delay of excressionarry expenses like maintenance and advertising near pdend. That's shortsignted tho bc next period u gotta ramp up maintenance or u may have much more expensive dmg to equipment. Legitimately delay r&d exps. Structure leases only for private clients through 2021 where new lease info doesn't apply. Structure of leases do not meet any of the 4 capital lease criteria so that no liability has to show up on a bs. It approves especially the debt to equity rate is not fair game for public companies bc the new least standard kicked in at the end of 2019.

l(1) GL Control/Sub-ledger Symptoms (stand alone ratios) -IN-CLASS Mini Case #2B: Q: What (if any) unusual current ratio (debt covenant) symptoms exist 'below'? - EX: Yr 1 Yr 2 Yr 3 (Corinthian For-Profit Univ.) 1.02 1.00 1.01

Not below 1 but so close so red flag. Not in violation but theyre so close to violation that it makes us think they've maniputlated the numbers just enough. Could be actually .6. not enough current assets to pay current liabs due. Company may be done in a few months stuck writing down ada. They will likeyk increase int rates on this loan every yr this is violated to compensate for the increased risk of default. In extreme situations if they fear that this firm will be dead, perhaps in the next 6 months and not pay us massive amts they will call the loan immediately. Saying u have to pay back the millions in principle now before u file for bankruptcy. And b4 everyone else gets paid we are going to make sure we get paid. So look out for any related debt convenants w lt notes payable agreements, make sure that we review those, recalc some of them for high risk engagements, and see how close we are to violating. Debt convenants can vary. Sometimes ratio or dollar amt. up to discretion of financial institution.

zMini Case #1 y(Text) P12-25(a) Identify Flowchart control weaknesses

Payroll shouldn't be distributing paychecks that's treasury Factory employees Biometrics is the only retail showroom employee tracking. Maybe gps technology in remote and vehicle employees. Factory employees should not be clocking in ontheeir smartphones bc they can pass that to someone else. Can track where they go after they complete 1 assingmnet, do they go home or hang out or go to their next job. Foreman reviews their time. Should be supervisor instead. No one reviews the foremans timesheet when they could be hourly and alter it. No indication that foremans itme is being reviewed independently. Foremen can adjust anyones time and approve it like a ghost and then foreman receives checks to distribute (when physical but should be online) and he could take them. Foreman should not distribute checks or have custondy of unclaimed checks. Electronic and physical checks should be under control of treasury. Cash receipts in rev process should be w treasury or cashier. personne;l: some indication that they have primary custody of hr file auth approval component but could be clear that they have payroll hr master file Payroll clerk #1: should not assign checks or verify them. Treasury only. Payroll clerk 2: low bookkeeping function. Should not have access to payroll register. Payroll director should review payroll register bc they are more aware (like foreman at maco level) who has been an employee in past snad today and connection to hr firings and addings and if it correstpons to payroll register Should also have corp acc row: should pay attention to jes 1-3 for reasonableness and corp acc should set up separate bank acct for payroll-impress bank acct so they can see money going into that bank acct total gross pay and payroll tax exp before running next checks then money flows right back out again and start next batch of checks w 0 bal in impress acct. comingle payroll trans within other trans would make t difficult to identify where fraud may eb occurring. Coud have bookkeeper or payroll to prepare implress reconciliation but cip acc w expertise should review impress w accuracy.

(D.) (Risk Response) Test of (Ending) Balances for Cash. l(3&4) Jan. 14 cut-off bank statement (and Dec. 31 bank reconciliation) à lQ: What is the purpose of a cut-off bank statement?

Per this 12/31 reconciliation clearing the bank only can be ab 14 days after ye. If not they may be fraudulent especially deposits in transit since they overstate cash bals. Possible that outstanding checks may not legitamitely clear within 14 days of ye cause misplacement but client should bring that to recipient vendors attention, calncel those checks and reissue others. Cutoff stmt should be obtained directly from bank regardless of whether its low moderate or high risk engagement. This reduces the risk the client might inflate cash bals and those subsequent cutoff stmts may also be inflated. To hide the fraud. Cleints 1231 bank rec, who should prepare it ideally?: corporate accounting that doesn't have too many ppl involved.

payroll fraud. ch 12 payroll and hr

Sig issue in construction industry and some other industries too.

l(1) A/R 'Aging' Schedule Cont. -IN-CLASS Mini-Case #4: ABC Sports is a manufacturer of various sports and fitness equipment.We are auditing the Allowance for Doubtful Accounts (ADA) as of 12/31/18.The gross A/R balance is $14.3 million, while the ADA is $1.2 million (or 33% of all A/R balances over 60 days old) as of 12/31/18.Our materiality for this smaller client is $500,000.The larger big-box 'public' stores tend to be current in paying their invoices, while the smaller boutique 'private' sporting goods stores tend to be slower in paying their sales invoices.A large % of the past due receivables are from the smaller boutique customers lFor each customer with A/R balances greater than 60 days old, the company evaluates all available evidence and determines whether a specific reserve is required for that customer. On the next slide are the last two fiscal year end A/R Agings (2017 on the left and 2018 on the right); Q: do you notice anything unusual? lThe ratio of the beginning ADA to subsequent write-offs in 2018 was 0.8, while the same ratio was 0.9 in 2017. lQ1: The increased % in the over 60 day old A/R categories in 2018 and the beginning ADA to subsequent write-offs ratios being below 1.0 suggests what about estimates for credit losses in the ADA? lQ2: In 'response' to these risks, what audit procedures would you perform (and would you focus more on the 'lower risk' or 'higher risk' procedures per the spectrum below)? STOP and COMPLETE MC #23 l

Thres not some deterioration in the aging from left to right side. About double ar in p;der 2 categories (60-+90) in 2018 than 2017. so allowance for dbt ful accts and related debits to bde would be expected to be higher this yr than last yr bc what ab subsequent specific writeoffs in 2018 compared to 2017, youd expect them to be increasing as the ar balances are getting quite a bit older this yr. expect write offs to increase also. Compare beginning allowance for doubtful accts / subsequent specific write offs in that same yr (big bath ex). For a healthy firm this ration should be at least 1, usually between 1 and 2. beginning allowance for dbtful accts should be at least a lil bigger than subsequent specific writeoffs. If it's a lil or a lot smaller for a small public firm, that's pretty low that ratio can clue u in to initial bde exstimate is understated or in a sweet sspot. NOTE: If I quickly convert this year's $ amounts to %s, we see a substantial decrease in 0-30 day old A/R (55% to 38%), and a substantial increase in 31-60 day old A/R (32% to 37% -- 5.3/14.4) and over 90 day old A/R (2% to 15%); NOTE: In the current year, 0-30 = $5.4mm; 31-60 = $5.3mm; 61-90 = $1.4mm; 91+ = $2.2mm) Its less than one which suggests the adequacy for allowance for dbtful accts is probably understated. q2: Higher risk: 1-evaluate the individual collectabilitiy of all over 60 day old ar by: challenge evidence obtained by mgmt. by searching for additional external evidence (ex: public record search of customer reviews and bankruptcy filings) Lower risk: 1- trade ada calculation to GJ->GL 2-agree estimated write off percentages for each aging category to company policy (need a copy of their policies and write offs). 3- recalculate ada per the ar aging using estimated percentages

risk assessment analytical review procedures (2) GL control/sub-ledger symptoms (vertical analysis): -IN-CLASS Mini-Case #2B: Bad debt expense as a % of sales decreases this year VS. last year may indicate what? lEX: Tech Data (SEC), 04/09/18

Vertical analysis. Figure it out b4 u ask mgmt. explanations: 1-people paid off their credit card bills and bad dbt on a more timely basis 2-having tighter credit basis/policies and made sure only most creditworthy customers are doing bus w u. backend 3: make stronger efforts to collect and dents on the back end. Delicate balancing act don't want to offend customers by quickly sending ar balance confirm. 1-people paid off theyr credit card bills on a more timely basis bc lower ar. Sales and ar could have declined but exps declined even more than that. Issuing company specific credit card may have tightened up credit policy and most credt worthy customers are buying. Not best for hospitality and energy industry. This is best for a robust economy(growing) (to reduce bde in future) tighter upfront credit policies, more aggressive collection policies, better economy, intentional understatement of bde or unrealistic model of computing bde. 2- economy is growing so they have more money to pay off on time. Stronger economy or industry 3-stronger efforts to collect on back end. Don't offend customers by sending quick ar balance collection letter on the 31st.

(C.) (Risk Response) Tests of (Ending) Balances for A/R and Sales. 2) a/r confirmations

a) *Assertion(s) _______ valuation and existence, much less likely completeness. Required on every f/s audit unless one of the following exists (AS 2310, par 34): -- A/R are immaterial/many small balances -- Inherent/control risk assessed at 'low' levels, in part, because no analytic problems. Q1: Why MUST the auditor maintain 'control' over the A/R confirm process? lA1: Supposed to generate pure 'outside' information (per ACC 352/652) -Without 'control', confirmations are less likely to produce pure outside information; thus (AS 2310, par 28): lMail out from firm office (not client location); include paid, return envelope to firm office; when returned, check 'post-mark' for appropriate responding city/state lEstablish direct communication with the intended 3rd party respondent* (to minimize the risk of interception and alteration by management*) à lQ2: With 'positive' confirmations, address the following: -What is the most common non-fraudulent 'exception(s)'? Cust sends back w exception -How are the # of confirmations (and specific balances) sent often determined? -Primary alternative procedure? Enter in 12/31 balances for customers and ask if they agree with it. -(Common non-fraudulent 'exception') timing difference - customer sends payment on 12/31, but is not received by the client until 1/1 OR client ships goods on 12/31 (FOB shipping point), but customer does not receive them until early January. -(# of confirmations) results of *data analytics and/or *judgmental procedures . Je scan or cutoff testing. Largest or oldest balances. Never returned or 100% return/ -(Alternative procedure) subsequent cash receipts per bank statement(s) DIRECTLY lLink cash receipts to supporting documents

lAn auditor should perform alternative procedures to substantiate the existence of A/R when: -A. No reply to a positive confirmation request is received. -B. No reply to a negative confirmation request is received. -C. The collectability of the receivables is in doubt. -D. Pledging of the receivables is probable.

a. Most common form of confirm request.

lAn auditor ordinarily sends a standard (cash) confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to: -A. Provide the data necessary to prepare a proof of cash. -B. Request that a cutoff bank statement and related checks be sent to the auditor. -C. Detect kiting activities that may otherwise not be discovered. -D. Seek information about loans from the banks.

a.Not sure proof of cash is prupose b.Cutoff stmt is normally separate request made subsequent to dec 31 cash confirm process. Were in to January before we make this cutoff stmt request form the bank. c.No d. Correct. For cash confirm not only do we fill in the 1231 cash balances at that bank but hteres also an area openfor the bank to let us know if client has any outstanding loans at that bank and then may be able to test the completeness assertion for lt debt. Bank may tell us ab loans that the client has not disclosed in their bs. Secondary purpose of cash confirm but focusing oncompeltenessasseriotn which is what we said the offset was less important but best answer

(1a) *Trace (PRs) à POs àreceiving reports (RRs) à purchase invoices (PIs) à purchases journal à cash disbursements journal (CDJ) and the cancelled check/electronic funds transfer - Utility/phone transactions will only see Pis bc will get bill every month no matter what but . not other sup docs .other services may need rec repots versus other service transactions -- Audit procedure = inspecting supporting documents via tracing. Will result normally from target unsuaual manual jes from previous slides. -- Assertion(s) = *__completeness (SG&A expenses)

airbus boeing ex -4% of all purchases last year vs. 14% of all purchases this year Supporting document trail stops, no receiving report available, no invoice, and no recording in the journal. Invoices/sales are what trigger debits and credits in the journal. May be not recording ap. Shouldve debited sga exps and cred ap. Or could reflecect increasing backorder. Legitimate.

(3) Collaborating

l"I attempt to deal with all of their and my concerns" l"I tell the other person my ideas and ask for his/hers l"I always lean toward a direct discussion of the problem" l"I usually seek the other person's help in working out a solution" Sweet spot between competition and accommodation Problem solver, good at resolving material aje conflicts. Empathetic listener, good relationships, short of sharing mat thresholds but they may be more effective at transparently considering alternative options that may produce reasonably satisfying solutions for both parties. Risks: tiem required to reach solution, competing cfo may try to exploit collaborators openness and flexibility.

(5) Avoiding

l"I try to postpone the issue until I have had some time to think it over" l"I sometimes avoid taking positions that would create controversy" l"There are times when I let others take responsibility for solving a problem". Some1 who may be extremely uncomfy in confronting conflict and others may resent not having their opinions addressed and others may feel like theyre walking on eggshells instead of thinking candidly ab their concerns. In an audit scenario w potentially material ajes to be discussed, and avoider may have a hard time trying to make a decision what aje amts they can ultimately support. Frustration will quickly come on cfo. Avoiding auditor needs to know they should take a break, clear their head from info overload.

(4) Compromising

l"I will let other persons have some of their positions if they let me have some of mine" l"I try to (quickly) find a fair combination of gains and losses for both of us." l"I try to find a position that is intermediate between theirs and mine". Like a competitor that desires a quick resolution to comflict w less material aje issues they help to maintain relationships but result in superficial understanding and conflict may come back in the future. For immaterial ajes this is a good enough approach. lWhen applied to material proposed AJEs, 'splitting the difference' (when there are still wide disparities between the auditor and the client's positions may unwittingly result in auditor's signing off on materially misstated financials: 1 exception to weighting immaterial ajes may involve several entries prior to ye. Ppe ex. Can increase mesups if they rush to complete 10k on time.

Five Approaches to Resolving Conflict

l(1) Competing/questioning l(2) Accommodating/ obligating l(3) Collaborating l(4) Compromising l(5) Avoiding

Additional 'Game Plan' Issues

l(1) Create trust ('deposits') through building relationships (within reason) with ALL levels of the accounting function AND discussing and satisfying client 'expectations' l(2) Attempt to match your 'persuasion style' with that of your counterpart . Or persuade them to ur pov. Cfos are likely persuaded by facts not emotions. l(3) Initially emphasize 'areas of agreement' l(4) initially share 'good news' b4 bad news

I. (C.) (Risk Response) Tests for Ending Account Balances. 1

l(1) Search for unrecorded A/P (a) Audit procedure = inspection via vouching (b) Assertion(s) = *C&E. especially C.

I. (C.) (Risk Response) Tests for Ending Account Balances. l(1) Search for unrecorded A/P (KPMG Short Case #2) Cont.

l(1) Search for unrecorded A/P (KPMG Short Case #2) Cont. -EXCEPTION: What if 'top side' A/P (Chp 12, 2nd half, ACC 750)? lGL Control à GL Sub-Ledger à JE à Supporting Documentation Inventory: 100 à full 100 à *none sup je à *PI, RR, PO, PR A/P: -0- à 100 à *none à *PI, RR, PO, PR (trace) lO ap subleger has full 100 but gl has 0 bc vendor needs to be paid on time don't want to offend vendor and have them cut off shipments to us. But if u don't record ap in control acct it understates liabs overstates equity. •for high risk engagements, we m/want to begin 'vouching' from the sub-ledgers (not the journals) • • •Unfortunately, a 'search' for unrecorded ap may have difficulty detecting a 'top side' A/P scheme; so, the most important alternative procedure involves RECONCILING the A/P control account w/ the A/P sub-ledger account; if the CONTROL is substantially LESS than the SUB-LEDGER, further investigation is definitely warranted!!

I. (A.) (Risk Assess.) Analytical Review Procedures. (2) GL control/sub-ledger à journal entry scan symptoms (ACC 750)

l(2) GL control/sub-ledger à journal entry scan symptoms (ACC 750) -EX: *Dr. A/P; Cr. SG&A expenses lSEC, Tech Data, 04/09/18) lCurrent rratio -Mindbridge (AI) Case (Chp 13). Je scan -EY Helix/Tableau Case (ACC 750)

I. (C.) (Risk Response) Tests for Ending Account Balances. 2a

l(2a) Reconcile vendor A/R statements to client A/P records for more low risk engagements. C is primary ap exertion. -- Audit technique = tracing -- Assertion(s) = *C&E -- Obtain a sample of vendor A/R statements (from the client that include the shipping terms and dates) and over a 'scope' tie large vendor A/R balances to the (trade) A/P aging and accrued expense sub-ledger; if they are not in these sub-ledgers, this may suggests understatement

I. (C.) (Risk Response) Tests for Ending Account Balances. 2b

l(2b) Confirmation of A/P (instead of 2a) if high risk. Not required on every engagement only if heightened risk of weak controls, inherently there are risk and preliminary risk assessment has found anomalous entries -IF 'high' control, inherent and fraud risk assessments -- Audit technique = confirmation -- Assertion(s) = *C (& less E) * May also help detect a key 'reversal' (Chp 6-8, ACC 750) JE Symptom: Dr. A/P AND Cr. SG&A expenses!!!

I. (B.) (Risk Response) Substantive Tests of (Detailed) Transactions. (3)

l(3) NOTE: Since Purchase Discounts and Returns and Allowances (R&As) are usually not material (unlike Sales R&As), preliminary analytics may be sufficient -If this year's Purchase Discounts and R&As as a % of Sales or CGS is similar to prior years, no further work may be considered necessary. lEX#1: (Discounts) 1/10, n/30 should always be taken; why? Yes convert it into annual rate of return bc its so good. Inherent weakness in purch process only shouldn't take discount if cash poor and cant pay in the first 10 days need extra 20 days. lEX#2: (R&A) Inferior quality goods (inventory) returned to vendors before attempts to sell to customers. Few day lag

(D.) (Risk Response) Test of (Ending) Balances for Cash

l(Ideally) prepare/obtain -(1) Dec. 31 bank transfer schedule. Only for high risk engagements. -(2) Dec. 31 cash confirmations (confirmation.com) à -(3) Jan. 14 cut-off bank statements, and (let us know on ab outstanding loans owed by client important for completeness audit lt debt. -(4) tie (3) to client's Dec. 31 bank reconciliation (mid jan cutoff bank stmt)

(B.) (Risk Response) Substantive Tests of Transactions for A/R and Sales. lSupporting documentation symptoms (Table 10-10): -(2) Sales Cut-Off

l(a) Assertion(s)? ___ lFor the last week of current YE AND *first week of next YE, assess proper 'timing' this is further vouching as result of je scan -(Vouch) JEs (sales journal) à *SI à *BofL à CSO - - W sales invoice, bill of lading, cust sales orders check date shipping terms to make sure recorded in right pd. For ex bill of lading dated in next pd but sales invoice dated in current pd (lazy bill and hold) Seeing exact same time stamp on sales invoice and bol near pd end (predating) -

(A.) (Risk Assessment) Analytical Review Procedures.

l*Journal entry scan symptoms: -(1a) Fictitious/sham sales lDr. A/R; Cr. Sales (with no matching Dr. CGS; Cr. Inventory) lSubsequent (period) entries to relieve fictitious A/R -Dr. Bad debt expenses; Cr. Allowance -Dr. Sales R&A; Cr. A/R . No matching debit to cogs and credit to inv. Neg affects ni. -In lieu of Bad Debts and Sales R&A à reduced NI: lDr. Cash; Cr. A/R (cash kiting or bogus balance - adding 0 to balance and hope auditors don't notice. ) lDr. A/P; Cr. A/R to take ficticious sale off balance and reduce ar balance.e lDr. *Fixed Assets; Cr. A/R. trading one fictitious asset for a lt fictitious asset. -(1a) Fictitious/sham sales (cont.) l(BARRY MINKOW MOVIE TRAILER) Video Clip, 2 min -https://wakeforestbusiness.knowmia.com/rGwo -IN-CLASS Mini Case #3: Q1: How is cash 'kiting' detected (2nd half recording)? Q2: How could Minkow's fictitious 'insurance restoration projects' (85% of reported revenues) be detected*? Fraud exposed on moms/individuals carpet cleaning firms sides. Bill them for way more than he claimed the service would be for them A1-kiting: inflating a false balance 12/31 Q2-should surprise barry and his firm instead of tellimg him ahead of time and setting it up -(1b) Cutoff/premature recognition (ACC 750) lDr. A/R; Cr. Sales (with no matching Dr. CGS; Cr. Inventory) -'Lazy' bill and hold l('gross' instead of 'net' method) à *NEXT period increases in Sales R&A and/or Sales Discounts -Channel stuffing (both); consignment (Sales R&A only) lAcceleration of Dr. Unearned Revenue; Cr. Warranty Revenue AND increases in up-front product-based (iPhone) revenue (period end) -Multi-performance obligations (best buy extended warranty and debit to unearned rev credit warranty rev to acceelrate). Reclassify unearned rev as rev for phones. Account for performance obligations seperately

EARNINGS MANAGEMENT

l: NON-fraudulent means to increase revenues à increase in net income to just meet quarterly/annual forecasted EPS without violating GAAP. Continuoum between earnings mgmt. and outright intent to deceive or fraud . Part of dif is materiality. Em should never involve a material adjustment to the financials and nature of investments should be more mute than an outright fraud.

1c. l(1) Search for unrecorded A/P Q1: What's involved in this 'search'? NOTE: (Trade) A/P = goods received/services incurred & invoiced @ 12/31 (vs.) *Accrued liab/exp Expenses = goods received/services incurred but not yet invoiced @ 12/31 produces additional manual jes near pdend. Debiting supplies ninvnetory, add exps, and crediting accrued liabs. Now when the invoice arrives, we will need to debit the accrued liab, credit the actual ap bal per invoice this may involve another je in the next pd or could be automated 1-30 days later for ex. Debit ap credit cash. Services incurred and goods received as of 12/31 w no invoice reflects a weakness in the vendors sales cycle. There should be a bill concurrent w the transfer of control of goods so n/30 clock can start as early as possible, benefiting the vendor. EXs: ads, utilities, rent, insurance, R&M, consulting, inventory, payroll, interest on L-T debt

l: search for unrecorded ap. -Obtain the cash disbursements journal (CDJ) AND *bank statements DIRECTLY (up to fieldwork's end if controls are weak) lOver a '*scope', tie large disbursements early in the next period to the (trade) A/P Aging AND/OR accrued expense sub-ledger @ 12/31 lIf they are not in the Aging or accrued sub-ledger, examine the date of the supporting PI/RR to see if they should have been recorded @ 12/31 --------à--------(12/31) ß 1/1 to field. end if weak control A/P CDJ & *Bank States. 'Pressure'

lMany personal purchases are negotiable

lMy advice lRecent car purchase Lose all ur negotiation leverage if u fall in love w a car or house. Need to be able to walk away.

Earnings Management

lNON-fraudulent means to decrease expenses à increase in net income to just meet quarterly/annual forecasted EPS without violating GAAP.

(B.) (Risk Response) Substantive Tests of Transactions for A/R and Sales. lSupporting documentation symptoms (Table 10-10): l(3) Related Parties (NEW) can have mat affect on fs.

lNOTE: In conjunction with obtaining an understanding of internal control over financial reporting, obtain an understanding of the client's process for: -(a) Identifying related parties and related transactions -(b) Authorizing transactions with related parties -(c) Accounting for and disclosing relationships and transactions * Per ACC 352/652, a top candidate for 'emphasis of a matter' 4th paragraph to unqualified report and could qual opinion if mat enough lNOTE: Sources of information in audit planning phase AND common 'red flags' of sham transactions during fieldwork (*AS 2410) Illegal act standard Illegal fraud standard Illegal acts and fraud lRelated Parties (NEW) Sources of information -(a) Board minutes. Has board discussed related parties of given them preferential treatment. -(b) 'Inquiry' l(1) Management - names of related parties, who has ownership interest, volume and terms of transactions, any transactions not in accordance with established policies (e.g., no 'sole source' K between a manager's close relative and client = key control) l(2) Vendors and legal counsel (if confidentiality permits) -- same as (1) l(3) Audit committee - understanding of significant transactions, any concerns lRelated Party (NEW) 'Red Flags' -(a) Large, unusual transactions near period end with low probability of collection . Ex: roundtripping. lEX: Fictitious revenue transactions (ACC 750) -(b) (Chp 11) Client payments for vendor goods/services at above market prices . Pref treatment lReview material cash disbursements for reasonableness . -(c) Sales to high risk, developing country jurisdictions lEX: (ACC 750) Bribery payments to obtain lucrative gov't contracts (Illegal Act, AS 2405). Not all need to be found but one lil one wont let us get sued. -(e) *(Chp 11) 'Consulting' services provided by board members or senior/middle managers lDr. Consulting Expense; Cr. Cash (ACC 750) -(f) (Chp 14) Real estate disposals at prices significantly above (or below) appraised values -(g) *(Chp 15) Interest free loans to closely related 3rd parties or no scheduled repayment terms or 'guarantee' provisions or 100% subsequent write-off lReview material loan contracts for vendors owned by managers. -(h) Compare (a)-(g) to 10-K related party footnotes to detect non-disclosed related parties Je will often be deb nr cr cash and looks credible but note intent is to never pay it. -So What Question (SEC Enforcements) -EX#1: Broker-dealer (06/14/17) l(Client and Auditor) Didn't obtain an adequate understanding of the nature, purpose and collectability of related party material A/R (fictitious sales transactions) -No A/R confirmation 'exception' follow-up AND no alternative procedures for non-respondents They didn't follow up on all the exceptions that came up w the fictitious sales transactions or find alternative procedures.

(B.) (Risk Response) Introduction

lPrimary 'PERCV' assertion violated.... -For companies in financial distress lExistence (E) -For companies who have already met Wall Street's earnings expectations (less common) lCompleteness (C)

(B.) (Risk Response) Substantive Tests of Transactions for A/R and Sales. lSupporting documentation symptoms (Table 10-10): -(1) VOUCHING (*throughout the year)

lTake JEs à create Sales Invoice (SI) à Bill of Lading (BofL) à CSO l(a) Assertion(s)? *____ lCompletion second improtant Especially if this relates to a high risk transaction, it will be detected in gl control subledger level and perhaps more importantly on the je scan level. Apply a targetedsample to vouch throughout the yr and as part of sales cutoff testing near pd end.

II. (Risk Response) Subsequent Cash Disbursements

lUnderstatement or 'C' concern (BRIEF* bc already sent out cash confirms in ch 10 and 16) -See cash confirmation testing (Chp 10/16) lBc Cash confirms and cash disbursements provide a likely accureate cash balance.,

Payroll Fraud Schemes. z(Additional) ways to detect (or prevent)

y(1) (Prevention) Separate Treasury function to sign and distribute paychecks y(2) (Detection) Corporate Accounting to review monthly 'imprest payroll account' reconciliations for reasonableness. y(3) (Detection) Periodic contact with applicable federal/state authorities to confirm w/holding receipt (time consuming). Received on timely basis or not y yNOTE: (Detection) Ghost employees AND overstated hours (ACC 750, Chp 14)

zNOTE: 'document flows' and related segregation of duties in F12-1 (p. 424)

yFundamental concerns (again) are weak segregation of duties (*access controls) AND unauthorized payroll program changes

(B.) (Risk Response) Substantive Tests of Payroll Transactions (JEs 1-2)

z(1a) Vouch payroll register 'hours worked' à time summaries (via biometrics or GPS tracking -- Chp 14, ACC 750) z(1b) Vouch payroll register pay rates* à HR payroll master file and signed employee documents z(1c) Vouch payroll register 'deductions' (or 'payables') à HR signed employee voluntary deduction forms yReview/re-compute required (fed/state) HR 'deductions' AND (additional employer) payroll tax expenses (JE#2) for reasonableness z(2a) Trace payroll register (total) 'gross earnings' à JE#1 ('expenses') à GL sub-ledger/control z(2b) Trace payroll register (total) 'net pay'(final je credit in je1) à JE#1 ('cash') à GL sub-ledger/control à (total) direct deposits* •Vouching will be on a more individual transaction/ sampling basis while tracing is at a macro/total payroll/pay period basis. Not automated yet z(2c) Trace payroll register (total) 'deductions' à JE#1 ('payables') à GL sub-ledger/control à (total) JE#3 electronic (cash) payments. Arrow = to.

(A.) (Risk Assessment) Analytical Review Procedures (JEs 1-3)

zAfter controlling for changes in 'head count': zAnalytic Test #1: Compare 'net pay' as % of sales this year versus last year. zQ1: What's our primary assertion concern? E z zAnalytic Test #2: Compare payroll 'deductions' or 'payables wh' (AND subsequent cash payments) as % of TAs this year versus last year. zCompare payroll tax expenses as a % of gross wages/salaries expenses zQ2: What's our primary assertion concern? C z AnalyticTest #3: Compare budget to actual 'net pay' AND payroll 'payables'

Outline of Areas Covered

zI. Periodic Payroll (discrete) Transactions/JEs (1-3) x(A.) (Risk Assess.) Analytics x(B.) (Risk Response) Substantive tests of (detailed) transactions x(C.) (Risk Response) Tests of (ending) account balances zII. Payroll Schemes y('E') Unintentional or intentional 'net pay' overstatement x('E') Ghost employees/overstated hours worked (ACC 750) y y('C') 'Payables' AND subsequent cash payments as it relates to those payables not being completely recorded

(C.) (Risk Response) Tests of (Ending) Account Balances (JEs 1-3)

zIf 'high risk' per analytics y(1) 'Imprest' Payroll Account xMonthly reconciliations reviewed by Corporate Accounting for reasonableness •See the Payroll Fraud Case z y(2) Account Analysis Schedule (Exh. 12-3) xShould include Payroll 'deductions' (or 'payables') including accruals (JE#s 1&2 portion) that are paid in (JE #3) but that exhibit only summarizes accrued but should also include nonaccred for je 1 and 2. zEX#1: See the Payroll Fraud Case zEX#2: IT Services (SEC, 12/27/17) zController stole $19 million from the payroll liabilities/withholdings that were supposed to be paid to a healthcare insurance provider* z

I. (B.) (Risk Response) Substantive Tests of (Detailed) Transactions. •Supporting documentation symptoms (1b

•(1b) *Vouch a sample of transactions from the purchases journal à PI à RR à PO à PR -- Audit procedure = inspecting supporting documents via vouching -- Assertion(s) = *__ existence (Inventory/supplies)

Brief Review (Revenue Recognition & Measurement) l5-step process (ASC 606-10-5-4):

•Step 1: Identify the contract(s) with a customer •Step 2: Identify the performance obligations in the contract •Step 3: Determine the transaction price •Step 4: Allocate the transaction price to the performance obligations in the contract •Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Revenue recog is extremely high risk. Adopting new complex stdrd for 1st time and experience recession related rev risk Key goal of this new standard is a more integrated performance obligated approach. The idea of multiple performance obligations didn't really exist before this approach. So there was no rev recog consistency but now w this there is.