406 exam 2 ch 10 pt.1

Control Activities and Test of Controls - revenue transactions: types of assertions

ACOCA

_______ - recording of all sales invoice / collection / credit memo in individual customer accounts

AR

seg of duties: o Ppl involved in order entry, credit, billing function should not have access to ________ (3)

AR, GL, cash receipt acivities

plan the evidence we will collect by account and assertion: how much evidence needed = ______ to solve for _____

ARM, detection risk

types of misstatement risks (3)

IR/CR/ fraud risk

plan the evidence we will collect by account and assertion: to plan evidence, 1st need to determine ______ for the cycle, then choose ______

TM, strategy

Thus, a response is required for positive confirmation requests regardless of whether the customer believes that the __________. A negative confirmation requests that the customer respond only when_______

amount is correct or not, amount is incorrect

plan the evidence we will collect by account and assertion: goal is to develop a ______

audit program

_______- sales where the customer agrees to purch the goods, but the seller retains physical possession until the customer requests shipments

bill and hold sales (aka parked inv scheme)

_____ - issuance of sales invoice to customers for goods shipped

billing

seg of duties: o Credit function separate from ______ o AR separate from ________ o Shipping separate from _______ o Cash receipts separate from _____

billing, general ledger, billing, ar

how to audit a FS cycle: auditors focus their tome on ______, related _____, and the resulting ______

business trans, controls, trans

________ - processing of the receipt of cash from customers

cash receipts

______ - marketing practices that suppliers sometimes use to boost sales by inducting distributors to buy more inventory than they can promptly resell

channel stuffing (aka trade loading)

how can you test the following controls: Timely matching of sales invoices and shipping documents or other documents.

compare documents to journal

_______ factor: May be disputed between auditor and management over when revenue / expenses / related profits should be recognized

complex of rev recog process

Set and document the control risk for the revenue process: set achieved level of ______, if results of test dont support planned level then set control risk at lower / higher level

control risk, higher

______ - when customer purch product on credit from the entity for the 1st time

credit approval form

______- approp approval of customer orders for credit worthiness

credit authorization

______ - details of the type and quan of products or services ordered by the customer

customer sales order

________ - contains the details of all sales, cash receipt, credit memo trans processed through customer account

customer statement

______ factor: Difficult to audit can pose inherent risk problems. Risk of MM for these estimates is a function of factors such as complex and reliability

diff of audit trans and AB

how can you test the following controls: Authorization for credit sales. Authorization for shipping. Authorization for prices and terms of sale

examine documents for approval

collect and eval evidence: once we have evidence, compare _____ to _____

findings to tolerable mis

______ - proper classification of revenue / collections / rec in the FS accounts

general ledger

5 step approach of rev recognition

identify contracts / performance obligations, determine trans price, allocate trans price to performance obligation, rec revenue when entity satisfied obligations

collect and eval evidence: might need to ____ testing, get more / less evidence from client

increase, more

_____ factors: Probability, level of competition, rate of tech change

industry related

4 specific IR factors that may affect the rev process

industry related, complex of rev rec, difficulty of audit trans, misstatement detected in prior audits

rev transactions: Considering the assertions and the possible misstatements that can occur if _______ does not operate effectively

internal controls

how can you test the following controls: Use of and accounting for pre-numbered documents

look for sequences of documents that omitt / duplicate numbers

______ factor: Presence of misstatements in previous audits is good indicator that misstatements are likely to be present during the current audit

misstatement detected in prior audits

assess risk: 1st identify _____ and link them to _____

misstatement risk, assertions

_______ confirmation requests are used when there are a large number of accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmation.

negative

how can you test the following controls: Mailing of monthly statements & independent channel for handling customer's billing complaints

observation and examine files

which 2 assertions to focus on when auditing sales

occurrence and cutoff

______ - processing has not been completed bc of items out of order or backorder

open order report

______ - acceptance of customer orders for goods into the system in accordance w/ management criteria

order entry

7 functions in the rev process

order entry, credit authorization, shipping, billing, cash receipts, ar, GL

______ confirmations are generally used when an account contains large individual balances or if errors are anticipated because control risk is assessed to be high

positive

understand nature: goal is to identify _____ and _____

potential mis and key controls

preliminary AP for revenue allows us to link _____ to ______ that we will focus more on during audit

potential miss to assertions

______ - transaction that are not considered arm's length

related party trans

3 major steps in setting CR for the rev process: understand and document rev process based on _______, plan and perform _____, set and document _____

reliance strategy, test of controls, control risk

2 types of strategies to choose from

relying on controls or using substantive

Plan and perform test of controls on revenue transactions: examine _____ to identify relevant controls that help to prevent / detect /correct MM

rev process

An entity recognizes _______ to depict the transfer of promised goods to customers in an amount that reflects the ______ to which the entity expects to be entitled in exchange for goods / services

revenue, consideration

3 types of transactions are typically processed through the revenue process

sale of goods, receipt of cash, return of goods

_______- used to bill the customer

sales invoice

3 misstatements that affect the occurrence of sales

sales recorded before shipment, duplicate sales, fake sales

the goal of revenue is to _____

sell things

understand nature: 4 most common key controls

sep of duties, info process control, physical control, performance review (SIPP)

_______ - ship goods that have been authorized

shipping

which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? billing department supervisor matches _____ w/ ______

shipping doc with entries

_______ - be prepared anytime goods are shipped to customer. Serve as a bill of landing

shipping document

Revenue recognition process occurs over a short / long period of time

short

4 fraud risks related to rev recognittion

side aggrement, channel stuffing, related party trans, bill and hold sales

______ - arrangements that are used to alter the terms of recorded sales in order to entice customers to accept delivery of goods

side aggrements

t/f: Auditors have the responsibility to provide reasonable assurance that the financial statements contain no material misstatements due to fraud.

t

plan the evidence we will collect by account and assertion: after know how much evidence, we then pan tests..such as____(4). do this using ______

test of controls / sub test of trans / sub ap / detalied test of balances, MIRADCOPS

collect and eval evidence: look at _____ and _____ to reassess CR

test of controls and sub test of trans

· Key segregation of duties Important in revenue process bc the potential for ____and___

theft and fraud

4 steps to audit FS cycle

understand nature, assess risk, plan the evidence that will collect, collect and eval evidence

auditors focus on these when auditing FS cycle bc it helps with "_________"

what could go wrong and is there any IC in place to stop it

- For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not approve ______ of customers' accounts

write offs