Auditing Test 3

Step _______purchase order is received from the customer, the client fills out a sales order which goes to the credit department for approval to make the sale. the treasury dept releases the credit, authorization

1

Step ____ approved sales order goes to warehouse and goods are transferred to shipping and a shipping document is created which goes to the customer. you can now recognize the sale. Custody

2

Step _____ billing customers and accounting with a sales invoice and recognizing revenue. Recording

3

Step ____ collecting and depositing cash

4

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance list that is forwarded to the cashier. A copy of the list should be sent to the

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Observe client comparing shipping quantities to quantities recorded as sold is used to test the assertion of __________

Accuracy of revenue

Vouch prices to approved price list is used to test the assertion of ______

Accuracy of revenue and accounts receivable

____ selects occurrences of key controls for the audit team to examine using tests of controls.

Attributes sampling

________of transactions comes from credit checks prior to approval of sale, and pricing, write offs. they should all be the same people. Credit dept and treasurer.

Authorization

________ is a shipping document prepared and sent with a common carrier like fed ex

Bill of lading

In preparing for the audit of cash, the auditors perform analytical procedures concerning cash balances, _________ would be the best source of information for use in the estimate of cash

Cash budgets.

_____ is a step involved with determining the upper limit on misstatements is ordinarily performed earliest. .

Determine the audited value of the item and compare it to the recorded balance

__________ is used when the internal control is so important you can't tolerate a deviation

Discovery Sampling

_______is a type of fraud that involves an employee misappropriating an employer's money or property entrusted to the employee's control in the employee's normal job.

Embezzlement

_______is hwere customer doesn't agree with the confirmations sent. Most common is already paid

Exception

Accounts Receivable

Existence, completeness and valuation

The _________ determination is based on prior audits for recurring engagements or a pilot sample of controls for first year with a direct relationship to sample size

Expected population deviation rate

_______ in the selection of audit procedures to be performed by auditors include: Varying the timing of the audit procedures, selecting items for testing that have lower amounts or are otherwise outside customary selection parameters, and performing audit procedures on an unannounced basis.

Incorporating elements of unpredictability

________might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date

Inflating sales for the year

__________is the delayed recording of cash receipts to cover a cash shortage.

Lapping

Assumes each item in population has a similar balance. Estimates recorded balance by multiplying number of components by average audited value

Mean per unit

_________ sampling used in auditing, defines the sampling unit as an individual dollar in an account balance, auditor selects individual dollar for examination

Monetary unit sampling

_________ are most appropriate when the assessed level of risk is low, dollar balances on accounts are small, and the auditor believes recipients will give consideration to the confirmations.

Negative confirmations

__________ client has amounts owed by customers, contact the customer to gather evidence, do you owe the company the amount they say you do. Agree, send it back, disagree with explanation.

Positive confirmation

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing.

___________is an effective audit procedure that an auditor might use to detect kiting between intercompany banks

Prepare a schedule of the bank transfers.

The audit team controls _______ in an attributes sampling application, but not the _______

ROO (risk of overreliance); ROU (risk of underreliance)

To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all_____

Receiving reports.

______is NOT a main factor influencing the sample size in an attributes sampling application

Risk of underreliance

_______ is a separate account for each customer.

Subsidiary ledger

_________ are vouch recorded sales to supporting documentation, trace bills of lading to recorded sales, test sales cut off by examining invoices and shipping documents prior to year end

Substantive procedures for revenue

The projected misstatement is determined by multiplying the sampling interval by the _______

Tainting percentage.

the auditor consider to be an incompatible operation if the cashier receives remittances and ___

The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

____could prevent a paid disbursement voucher from being presented for payment a second time

The official signing the check should compare it with the voucher and should stamp "paid" on the voucher documents.

_______ is one of the most important internal controls vendor invoice, receiving report, purchase order also known as the voucher package

The three way match

When evaluating the results of an MUS application, the audit team should compare the upper limit on misstatements to the

Tolerable misstatement.

________is not used in determining the upper limit on misstatements

Tolerable misstatement.

_________ starts at receiving reports and goes towards the journal

Trace sampling

The _______ is the sum of the sample rate of deviation and the allowance for sampling risk.

ULRD

The interpretation of the _____ in an attributes sampling application is the estimated rate of deviation in the population with probability equal to the risk of overreliance that the population deviation rate is higher.

ULRD

______would conceal this defalcation and be least likely to be detected by an auditor when cash receipts from sales on account have been misappropriated

Understating the sales journal.

If the _______ is less than the _______, the audit team would conclude that the account balance is fairly stated.

Upper limit on misstatements; tolerable misstatement.

_______ can be used to estimate amount of misstatement and true account balance

Variables sampling methods

_______is used to establish support for recorded amounts.

Vouching

auditors' primary concern with respect to liabilities resulting from the purchasing system is that ___________ are not materially understated. this is listed under the ________ assertion

accounts payable; completeness

A purchased item listed on the monthly vendor statement should be included in the accounts payable. If it cannot be traced to the ________ record, the vendor account will be _________.

accounts payable; understated

Number one test for __________ is confirming balances with customers unless the balance is immaterial, confirmation would be ineffective, other procedures to allow you to gather without confirming assessed level of risk of material statement is low

accounts receivable

The total of the subsidiary ledger account _________balances should equal the balance of the controlling account, general ledger

accounts receivable

When a sample of customer _________ is selected for vouching debits, auditors will vouch them to Sales invoices with shipping documents and customer sales invoices.

accounts receivable

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the _________

accounts receivable listing

when auditing cash you _____ where you trace to cash receipts journal and vouch to cutoff bank statement

add deposits in transit

when you audit cash and have to _________ where you inspect bank/credit memo and audit for reasonablemess. Examine relevant supporting documents

add/subtract other debit/credit memos

The search for unrecorded liabilities generally depends upon using accounting records created in the period __________

after the year end

The upper limit rate of deviation - the sample rate of deviation =

allowance for sampling risk

The risk of overreliance results in ______ loss.

an effectiveness

It is usually best to have an anonymous employee hotline responded to by ______.

an outside third-party agency

Obtaining more reliable information, performing procedures close to year-end, and applying computer-assisted techniques to all items is a way that audit procedures can be modified to address ________

assessed fraud risks

Performing tests of controls to determine the operating effectiveness of internal control and assess control risk, and to determine the extent to which some characteristic exists within a population of interest is done using ______

attributes sampling

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of ______ risk.

audit

when auditing cash you have to _________where you confirm information directly from the bank and agree amount to cutoff of the the statement

audit the balance per bank

Legal fees, misc expense, maintenance repairs and professional fees are accounts that ________

auditors always want to look at

to ______ when auditing cash you foot the entire reconciliation for matematical accuracey and trace the amount to the trial balance.

balance per books

_____ supports bank reconciliation and can be used to compare date deposit recorded on book versus bank

bank statement

The auditor assess inherent risk to determine where a material misstatement could enter the process ______ the consideration of any internal controls.

before

________ positive confirmation where the dollar amount is not provided. Fill in the amount you owe. Forces the customer to look something up. response rate is lower

blank confirmation

________select contiguous units. not random

block selection

_______ are used to test for payees, amounts or dates that do not match chas dispbursements journal

canceled checks

The person who authorizes _________ should not have custody of checks or be in charge of record keeping for payment or bank reconciliations

cash disbursements

______ are where detailed entries for all payments of cash are kept

cash disbursment journal

Adjusting and correcting entries that can result from the bank account reconciliation are found in the_____

cash receipts journal

_________ are where detailed entires for all recepts of cash are kept

cash receipts journal

If cash is received but there is no invoice, you should determine if __________

cash relates to disposals of property and other fixed assets.

The crucial link of the evidence to the criminal suspect that bears directly on the relevance of evidence is referred to as the

chain of custody

The standard deviation of error is considered in ______ but not in ______

classical variables sampling; monetary unit sampling

Trace posting of intercompany sales, sales returns, etc. to sales is used to test the assertion of _____

classification of accounts recievable

A _________ must be supported by the control environment, helps send the right message from the top, and is more likely to be supported if the Board chairman follows it

code of conduct for employees

Auditors review items in the pending order file for evidence of the _______ of recorded sales and accounts receivable.

completeness

When auditing account balances of liabilities, auditors are most concerned with management's assertion about _____

completeness

the most relevant assertion for accounts payable is ________. look at events that occur. tracing is the best way

completeness

Prenumbered documents are important in testing _____ assertion and the______ assertion

completeness; occurence

If the audit team established a low acceptable ______, the corresponding tolerable rate of deviation would also be low.

control risk

A __________ may be the audit team's first indication of fraud.

control violation

The age of accounts is an indication of _____

credit losses.

Verifying the dates on sales documents helps reduce the risk of misstatement related to the _______ assertion of revenue.

cutoff

Trace shipping documents to sales invoice date. Check FOB terms this is used to test the assertion of _____

cutoff of revenue

If cash is received that is less than the invoice amount _______

determine if there were unrecorded sales returns

In attributes sampling, the characteristic of interest is a_______ condition.

deviation or exception

Adjusting and correcting entries that result from bank reconciliations are found in the cash ______ journal.

disbursements; receipts

When deviations from controls are very critical yet expected to occur at a relatively low rate, the audit team may use____

discovery sampling

Auditors must gain an understanding of internal controls that are in place to mitigate assessed fraud risk and, at a minimum,______.

document that understanding in the workpapers

In ______, you must write a conclusion at the bottom, document the parameters used, description of method, sample items, measurement of sampling, ULRD

documentation

__________ is a strong internal control where 2 people handle cash at all times

dual custody

An audit test that provides evidence on both controls and relevant assertions is called a(n)________

dual purpose procedure

Auditors must obtain evidence supporting the reliability of controls surrounding the Confirmation (Confirmation.com) process for __________through Confirmation (Confirmation.com)

electronic cash confirmations

_________ generally includes a cover-up, usually involves some type of falsification, and is also called misappropriation of assets

employee fraud

________ is where you evaluate the sample results

evaluating

Account receivable primary assertion is _________

existence and valuation

Auditors usually suspect some level of deviation in the client's internal control activities which is referred to as the________

expected population deviation rate

the level of deviation suspected in the internal controls, based on prior engagements or pilot sample

expected population deviation rate

an insurance policy that covers cash imbezzlement losses are called

fidelity bonds

The possibility of detection can be an effective _____deterrent and a control violation may be the audit team's first indication of _____

fraud

The three conditions where ____are likely to occur are motivation, opportunity and rationalization

fraud

_______ select times in a nonsystematic manner. not random

haphazard selection

Because detection risk is lower for positive confirmations than negative confirmations, a positive confirmation is more likely when inherent risk is _______

high

ULRD is ______or equal than tolerable rate of deviation you would reduce reliance on internal control and increase control risk you would expand your sample size and perform additional tests of controls

higher

attribute sampling

how many times something is present or not

No cash received but invoiced

identify the invoices that matched those in the open accounts receivable table as of the end of the year.

The first step in the attributes sampling process is to ______.

identify the objective

If cash is received that is more than the invoice amount you should determine ________

if there were unrecorded sales

When don't we have to confirm accounts receivable if the balance is ______ or _______ and when the risk of material misstatement is low.

immaterial; ineffective

Invoice dated 1/20 for cleaning services for the month of December; not included in AP as of 12/31 is ______

improperly EXCLUDED from AP

Invoice received 12/30 for January temporary workers; included in AP as of 12/31 is _________

improperly included in AP

Revenue collection cycle

includes sales revenues, receivables and cash receipts

The audit team must consider the risk of _____ in determining sample size in monetary unit sampling.

incorrect acceptance

When making a decision about the dollar amount in an account balance based on a sample, the audit team considers the risk of ______to be more serious than the risk of incorrect rejection because the incorrect acceptance decision impairs the effectiveness of the audit.

incorrect acceptance

If the calculated ULRD exceeds the Tolerable rate of deviation, the audit team should _______ control risk and ______

increase; substantive procedures should be adjusted accordingly

According to the FASB Statement of Concepts, expenses may be recognized when they are ______.

incurred, allocated to future period (depreciation), matched to revenue

Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as ______ risk.

inherent

The risk of material misstatement is a combination of_______ and ______

inherent and control risk

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that shipments to the customers were ______

invoiced

In attributes sampling, the characteristic of interest ______.

is a deviation condition

Fraud issues in the purchasing department include the risk of ______.

kickbacks, fictitious invoices, misdirected purchases

________ is the deliberate floating of funds between tow or more bank accounts to make it appear that more cash is present and available, aka playing the float

kiting

_________is detected by a schedule of interbank transfer last five days of the year to see how the accounting was done.

kiting

Separation of duties between receiving cash and posting the accounts receivable ledger most likely would deter _____

lapping of collections from customers

An audit team would most likely examine the detail support for charges to _________ to determine potential litigation.

legal expense

_________ is where payments are remitted by customers to external location (usually a bank)

lockbox arrangement

ULRD is __________or equal than tolerable rate of deviation you would rely on internal control as planned and maintain control risk at planned levels.

lower

Personality red flags that may be indicative of fraud are most easily detected by ______.

managers

When completing a fraud examination auditors should ______.

mark the evidence on a separate tag or page

an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time is _______

marking them PAID

One of the primary advantages of ______ is the fact that the sample selection automatically achieves high-dollar selection and stratification.

monetary unit sampling

sampling risk can lead to two types of erroneous conclusions, in the case of a test of controls, that controls are _________

more or less effective than they actually are.

________ my client says you owe money, if it is correct, do not return confirmation. If it's not correct, send it back. less reliable evidence. Can use if rmm is low and other evidence is being gathered, population has to be a large number of small homogeneous receivables, low return expected, not aware of any customer circumstances to disregard request.

negative confirmation

________ is not doing a good audit, any error that you make while doing sampling that is not related to statistics, determine statistics wrong, mathematical problems. by better planning, training and better supervision

non sampling risk

The risk that the audit team's sample provides an incorrect conclusion for reasons other than the representativeness of the sample, is known as__________

nonsampling risk

sample rate of deviation

number of deviations/ sample size

The first procedure in an audit of cash is to _________ for each cash account and audit them

obtain a bank reconciliation

Revenue

occurence, completeness and cutoff

Primary assertion for revenue is _____

occurrence

Failure to count inventory on a regular basis provides ______ to commit fraud.

opportunity

Incentive/pressure, attitude/rationalization and _______ are the conditions that make up the fraud triangle

opportunity

The appropriate risk _______ is based on the planned level of control risk.

overreliance

When determining sample size, auditors consider the risk of ______.

overreliance

_________ is where you determine the sample size, select the sample items, and measure them

performing

Increasing the level of control risk, performing additional substantive procedures, or expanding the sample are all appropriate responses if the sample evidence does not support the ______

planned level of control risk.

___________ is where you determine the objective of sampling, define the characteristics of interest and define the population

planning

The ______ is the set of all items about which a conclusion is desired.

population

all potential applications of the control during the period examination is the definition of the ________

population

The _______ determination is based on number of applications of control to transactions with a direct relationship with sample size

population size

sampling interval=

populations size/ sample size

Systems may automatically produce customer invoices, but billings will be incorrect if the ________ is incorrect.

price list master file

Information required for business segment disclosures is provided by sales classified by ______.

product line

Invoice dated 1/5 for January security protection; not included in AP as of 12/31 is _____

properly excluded from AP

Invoice dated 12/20 for maintenance services and unpaid as of year end; listed in AP at 12/31 is _______

properly included in AP

It is suggested that there will be some expected population deviation rate under the concept of

reasonable assurance

Increasing the tolerable rate of deviation will _____ the sample size.

reduce

________ can be used to look for potential error or fraud due to unusually high or low volume.

region

When the upper limit rate of deviation is higher than the tolerable rate of deviation, the audit team reduces ________ and increases _______.

reliance on internal control; control risk

When the upper limit rate of deviation is less than or equal to the tolerable rate of deviation, the audit team______

relies on internal controls as planned and maintains control risk as planned

for cash recepts reconcile_______ daily

remittance listing, total receipts posted, deposit slip

__________ we rejected a balance that was correct. efficiency issue

risk fo incorrect rejection

______ is accepting an account balance that is misstated.

risk of incorrect acceptance

The _______ can ultimately result in the audit team's failing to reduce audit risk to acceptable levels.

risk of overreliance

The __________ occurs sample indicates controls are functioning effectively, or not functioning effectively. when the risk of assessing control risk too low.

risk of overreliance

the ________ occurs when sample indicates controls are not function effectively. Risk of Assessing Control risk too High

risk of under reliance

The _______ file can be checked for sales recorded before shipment and fictitious sales

sales detail (journal)

_____ can be used to look for potential error or fraud due to unusually high or low volume.

sales employee

Sales are normally recorded on the date of the _____

sales invoice

Dividing the number of deviations noted in the sample by the sample size is the calculation of the ______

sample rate of deviation

Dividing the number of deviations noted in the sample by the sample size is the calculation of the _________

sample rate of deviation

When you don't send confirmation to each customer, you are using_____

sampling

If the logical unit (component) selected for examination using monetary unit sampling, is larger than the ______ the projected misstatement would equal the actual misstatement

sampling interval

The possibility that the opinion of a group of people contacted about a issue differs from opinions of the entire population is referred to as

sampling risk

______ is the risk that a sample is not representative of the population

sampling risk

__________ is the risk that the auditors conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same auidt procedures

sampling risk

is the risk that sample differs from population

sampling risk

set of procedures designed to yield audit evidence of liabilities that were not recorded in the reporting period

search for unrecorded liabilities for the completeness assertion

The physical representation of the population is the frame of reference the audit team uses in ______.

selecting the sample

The person who authorizes payments should not be in charge of bank reconciliations in order to ensure proper _____ of _____

separation; duties

__________ is an approach to sampling that has a random selection of the sample items, and the use of an appropriate statistical technique to evaluate sample results including measurement of sampling risk

statistical sampling

must use unrestricted random selection or systematic random selection with______

statistical sampling

Audit processes to gather evidence on the assertions in account balances are called

substantive procedures

over-reliant on internal controls means you don't do enough _______ This is a big risk

substantive procedures

under reliant on internal controls means you do too many _____

substantive procedures

when you audit cash you ______ and vouch to cash dispursements journal, then trace checks cleared from cutoff bank statment

subtract outstanding checks

where you bypass a fixed number of items in population, selecting ever nth item

systematic random selection

_______ is immateriality for the account

tolerable misstatement

In determining the _________, the audit team should consider (1) the planned assessed level of control risk and (2) the degree of assurance desired by the audit evidence in the sample.

tolerable rate of deviation

__________ is the maximum rate of deviations permissible without modifying the assessed level of control risk

tolerable rate of deviation

The ______ and _______is based on the level of control risk with an inverse relationship with sample size

tolerable rate of deviation; Sampling risk

If the _____ exceeds the _____, the audit team would decide to rely on internal control as planned and maintain control risk at planned levels.

tolerable rate of deviation; ULRD.

All signed checks must be reviewed and compared with supporting documentation by the __________before mailing would best protect against the preparation of improper or inaccurate cash disbursements

treasurer

The starting point for selecting accounts for confirmation is the accounts receivable ______.

trial balance

An unexplained decrease in the ratio of gross profit to sales may suggest ______

unrecorded sales

is where you select items based on random numbers matched to items in population

unrestricted random selection

A conservative estimate of the population rate of deviation that allows the audit team to control exposure to sampling risk to acceptable levels is the ______

upper limit rate of deviation

ULRD is sample rate of deviation + allowance for sampling risk

upper limit rate of deviation

_________is a conservative estimate of the population rate that allows for sampling risk that consists of sample rate of deviation and allowance for sampling risk.

upper limit rate of deviation

Performing substantive tests of details to provide the necessary level of detection risk and evaluate the fairness of an account balance or class of transactions is done using ____sampling.

variable

__________ is used to estimate the amount of value of a population, estimate the misstatement, recorded balance and compare. Substantive procedure.

variable sampling

several departments are usually required to approve a _______

vendor

Cancellation of ________ by stamping them PAID prevents the voucher from mistakenly being paid a second time.

vouchers

___________starts at the journal and goes towards receiving reports

vouching

The auditor selects examples of a transaction and traces them from initial receipt to the recording in the accounting records when performing a(n)

walkthrough