Chapter 11- Audit

FASB Revenue Recognition Standard

1. identify the contract 2. identify performance obligations 3. determine the transaction price 4. allocate the transaction price to the performance obligation 5. recognize revenue when performance obligations are satisfied

step 1: identify the contract

A contract establishes the legal rights and obligations of the seller and customer with respect to one or more performance obligations. can be written, oral, or implied by customary business practices

aged trial balance

A listing of individual customers' accounts classified by the number of days subsequent to billing, that is, by age. A preliminary step in estimating the collectibility of accounts receivable.

step 2: identify performance obligations

A performance obligation is a promise to transfer a good or service that is distinct, which is the case if the good or service is both (a) capable of being distinct and (b) separately identifiable.

The best way to verify the amounts of dividend revenue received during the year is: Multiple Choice Recomputation. Verification by reference to dividend record books. Confirmation with dividend-paying companies. Examination of cash disbursements records.

Verification by reference to dividend record books.

Step 5: Recognize revenue when each performance obligation is satisfied

can be over time and at a point in time

the custodian of a notes receivable may not have access to

cash or to general accounting ledgers

storekeeper

companies that carry standard stock maintain a finished goods storeroom supervised by this person

verifying interest earned on notes receivable satisfies which primary audit objective?

completeness

what is the most common technique used by management to engage in fraudulent financial reporting?

improper revenue recognition

fidelity bond

insurance policy that pays the employer money in the case of employees' theft

in many situations, positive confirmation requests are used for ___ balances and negative confirmation requests are used for ___ balances

large; small

Accounts receivables also includes miscellaneous items like

loans to officers, loans to subsidiaries, claims against other firms, claims for tax refunds, and advances to suppliers

what are some examples of test of controls over AR and revenue?

test the controls over sales transactions by examining the process of recording transactions, trace details of shipping documents to related invoices, review the use and authorization of credit memorandum, test controls for over the counter sales by reconciling cash register records to sales tickets to sales journals

why are blank forms not usually used when confirming AR?

the additional time to fill in the dollar amount generally results in a lower response rate

AR that have been pledged should be plainly identified through

the coding of AR records

professional standards indicate that auditors should confirm AR unless

1. AR are immaterial 2. the use of confirmations would be ineffective 2. the auditor's risk of material misstatement is low and the auditors plan to obtain sufficient and appropriate audit evidence by performing other substantive procedures

auditors responses after a risk assessment include:

1. a response that has an overall effect on how the audit is conducted. (may need someone with significant experience to evaluate accounting principles used in revenue) 2. a response involving the design of audit procedures 3. a response involving performing procedures to further address the risk of material misstatement due to management's override of internal controls

what type of audit documentation is necessary for receivables and revenue?

1. aged trial balance of trade accounts receivable 2. analyses of other AR 3. analyses of notes receivable and related interest 4. analyses of allowance for uncollectible accounts and notes 5. comparative analyses of revenue by month, by territory, by product or by related forecasted revenue and actual revenue 6. documentation of internal control 7. risk analyses and audit plan

to identify related party transactions, auditors should review

1. proxy and other filing with the SEC or other regulatory agencies 2. conflict of interest statements obtained by the company from its management 3. transactions with customers or suppliers that have unusual terms 4. accounting records for unusual balances or transactions, particularly those occurring near year end

For any significant risk, the auditors

1. should evaluate the design of related controls and determine they are implemented 2. may not rely solely on analytical procedures to address the risk 3. may not rely on evidence obtained in prior periods regarding the operating effectiveness of the related controls

when replies are not received, the auditor should apply alternative procedures to the account unless

1. the amount of the non responses is not significant when projected as a 100% misstatement of the total balance of receivables 2. there are no unusual characteristics related to the responses

the use of solely negative confirmation requests are only appropriate when

1. the assessed level of the risk of material misstatement is low and sufficient and appropriate audit evidence has been obtained on operating effectiveness of controls 2. a large number of small, homogeneous balances are involved 3. a low exception rate is excepted 4. the auditors are not aware of any circumstances that would cause the recipients of the requests to disregard them

the date of each sales invoice should be compared with two other dates

1. the date of the related shipping document 2. the date of entry in the AR subsidiary ledger

positive confirmation requests

A request that the confirming party respond directly to the auditor providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request. (dollar amount)

Negative confirmation request

A request that the confirming party respond directly to the auditors indicating where the confirming party disagrees with the information in the request.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: Multiple Choice Sales orders file. Customer purchase orders. Accounts receivable subsidiary ledger. Shipping documents (bills of lading) file.

Accounts receivable subsidiary ledger.

channel stuffing

An accounting practice in which the manufacturer makes a large shipment to a distributor at the end of a quarter and records the shipment as sales, even though the distributor has not guaranteed sales of the product and has the right to return any unsold merchandise.

what are typical questions on an internal control questionnaire regarding AR and revenue?

Are orders from customers initiated and reviewed by the sales department? Are sales invoices pre numbered and are all documents accounted for? Are all sales invoices approved by the credit department before shipment? Are estimated of revenue approved by competent personnel using appropriate methods?

Which of the following would provide the most assurance concerning the valuation of accounts receivable? Multiple Choice Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. Compare receivable turnover ratios to industry statistics for reasonableness. Inquire about receivables pledged under loan agreements. Assess the allowance for uncollectible accounts for reasonableness.

Assess the allowance for uncollectible accounts for reasonableness.

pledging receivables

To assign to a bank, factor, finance company, or other lender an exclusive claim against accounts receivable as security for a debt.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? Multiple Choice Existence or occurrence. Completeness. Rights and obligations. Presentation and disclosure.

Completeness.

e. You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: Multiple Choice Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. Coordinate the count of cash with the cutoff of accounts payable. Coordinate the count of cash with the count of marketable securities and other negotiable assets. Count the cash immediately upon the return of the confirmation letters from the financial institution.

Coordinate the count of cash with the count of marketable securities and other negotiable assets.

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? Multiple Choice Collectibility is reasonably assured. Delivery has occurred or is scheduled to occur in the near future. Persuasive evidence of an arrangement exists. The seller's price to the buyer is fixed or determinable.

Delivery has occurred or is scheduled to occur in the near future.

the internal auditing department should periodically confirm notes with

their maker

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: Multiple Choice Cutoff bank statement. Year-end bank statement. Bank confirmation. General ledger.

General ledger.

the best alternative auditing procedures when confirmations do not work is

examination of subsequent cash receipts in payment of the receivable

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? Multiple Choice Excessive goods returned for credit. Unrecorded sales discounts. Lapping of year-end accounts receivable. Inflated sales for the year.

Inflated sales for the year.

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also: Multiple Choice Reviews the monthly bank reconciliation. Returns the checks to accounts payable. Is denied access to the supporting documents. Is responsible for mailing the check

Is responsible for mailing the check

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? Multiple Choice Observe the consistency of the employees' use of cash registers and tapes. Inquire about employees' access to recorded but undeposited cash. Trace deposits in the cash receipts journal to the cash balance in the general ledger. Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employees' use of cash registers and tapes

Reconciliation of the bank account should not be performed by an individual who also: Multiple Choice Processes cash disbursements. Has custody of securities. Prepares the cash budget. Reviews inventory reports.

Processes cash disbursements.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? Multiple Choice Inaccurate billing due to a lack of controls. Lapping of accounts receivable. Misbilling a client due to a data input error. Recording sales when the customer is likely to return the goods.

Recording sales when the customer is likely to return the goods.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: Multiple Choice Send positive confirmation requests. Send negative confirmation requests. Examine evidence of subsequent cash receipts. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Send positive confirmation requests.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: Multiple Choice Shipping documents file. Sales journal. Accounts receivable subsidiary ledger. Remittance advices.

Shipping documents file.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: Multiple Choice Supported by a vendor's invoice. Stamped "paid" by the check signer. Prenumbered and accounted for. Approved for authorized purchases.

Stamped "paid" by the check signer.

inspecting notes on hand and confirming those not on hand satisfies which primary audit objectives?

existence, occurrence, and rights

step 3: determine the transaction price

The transaction price is the amount the seller is entitled to receive from the customer.

examples of inherent risks that relate to revenue include

a decline in sales due to economic conditions, product obsoleteness, increased competition, shift in product or demand, inability to collect receivables, improper revenue recognition (either fraud or mistake), restrictions on sales based off laws or regulations

who should perform billing?

a department not under the control of sales executives

bill and hold

a fraudulent financial reporting activity by which a company recognizes a sale even though it does not ship the merchandise to the customer but holds it in its own warehouse

bill of lading

a legal contract that defines responsibility for goods while they are in transit

the acceptance and renewal of notes receivable must be authorized in writing by

a responsible officer who does not have custody of the notes

reviewing year end cutoff to sales transactions satisfies which audit objectives?

existence, occurrence, rights, and cutoff

a perpetual inventory records of finished goods should be maintained by the __ __, not the storekeeper

accounting department

Step 4: Allocate the transaction price to the separate performance obligations

allocation is made based on the relative value of the various performance obligations when each is separate

relevance of controls (management review controls)

based on whether the controls address appropriate financial statement assertions

what are some examples of substantive procedures over AR and revenue?

confirm receivables with debtors, obtain analyses of notes receivable and related interest with general ledger, review significant year end sales contracts for unusual terms, review year end cutoff of transactions

all adjustments to sales for allowances, returns, write offs of accounts receivable should be supported by serial numbered __ ___, and signed off by an officer or responsible employee having no duties related to ___ handling or to maintenance of ___ ____

credit memorandum; cash; customers' ledgers

precision of controls (management review controls)

depends on the level of aggregation of data, the consistency of performance, the predictability of management expectations, and the criteria used to determine which items are investigated

confirming receivables with debtors satisfies which primary audit objective?

existence, occurrence, rights, valuation, and accuracy

in banks and other financial institutions, __ ___ accounts for their single most important asset

notes receivable

__ ___ do not meet the definition of external confirmation, which is defined as including a written response

oral confirmation

the sample sizes relating to AR and revenue are influenced by

use of positive or negative confirmation requests, tolerable misstatement, certain characteristics of the population, significant exceptions in prior years, level of sampling risk accepted

determining the accuracy of allowance for uncollectible accounts satisfies which audit objective?

valuation

obtaining an aged listing of receivables and reconciling that to ledgers and obtaining a notes receivable and related interest analyses satisfies which primary audit objective?

valuation and accuracy