Audit 550

Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year.

"We also owe for two more invoices for purchases we made around year-end; I'm not sure of the exact date."

Send a second confirmation request to the customer or Examine shipping documents and /or subsequent cash receipts

"We are very satisfied with Jelco and plan to purchase from them in the future.

Exception; propose and an adjustment.

"We returned those goods on December 2" you have been able to determine that the goods were received by the client on December 29, but not recorded until January 2.

Examine shipping documents and /or subsequent cash receipts

"While that's what we owe, we didn't owe it on December 31 since we didn't receive the goods until January 2 of year 2"

-Over all account balance is immaterial -external confirmation procedures would be in effective -Auditor's assessed level of risk of material misstatement of relevant assertun level is low, & other planned substantive procedure address the assessed risk

- For A/R, N/R and Revenue Auditors are required to use external confirmation procedures unless:

Valuation

-Audit valuate interest Income, Interest Receivable and Amortization by independent computation (Re-calculate)

Alternative Audit procedures for nonrespondents

-Follow up with 2nd and 3rd request to produce replies -Apply alternative procedures: -examination of subsequent cash receipts, shipping, documents, customer purchase orders and sales invoices

Perform analytical procedures for A/R, N/R and revenue

-Ratios, relationships can be computed to indicate the overall reasonable of the amounts shown for A/R, N/R -Unusual and unexpected Ex, if it is 68% it is unusual so the risk is high and you need to do more tes

Example of Estimates

-Sales Returns -Allowance for bad Debt -5 of completion Revenue

Proof of cash

1. A fraud detection procedure that may be used for any months during the year 2. Used to identify: -cash receipts and disbursements recorded in the accounting records, but not on the bank statement -cash deposits and disbursements recorded on the bank statement, but not in the accounting records -cash receipts and disbursements recorded at different amounts by the bank than in the accounting records.

Account payable requires a 3 way match before processing

1. Purchase order (purchasing department) 2. Invoice (vendor) 3. Receiving Report (Receiving Department)

Substantive procedures for cash transactions and balance

1. obtain an analysis of cash balances and reconcile them to general ledger 2. Confirm cash balances with Financial Institutions 3. Obtain or prepare reconciliation of bank accounts as of the balance sheet date and consider the need to reconcile bank activity for additional months. 4. Obtain Cutoff bank statement containing transactions of at least seven business days subsequent to the balance sheet date. 5. count and list cash on hand 6. verify the clients cutoff of cash receipts and cash disbursements 7. analyze Bank transfers for the last week of the audit year and the first week of the following year 8. Investigate any checks representing large or unusual payments to related parties 9. Evaluate financial statement presentation

Incorrect

A combination of positive and negative request forms must be used if receivables are significant.

Nonresponse

A failure of the confirming party to to respond, or fully respond, to a positive confirmation request or a confirmation request returned undelivered.

Positive confirmation request

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

A risk exists however, that a confirming party may reply to the confirmation request without verifying that the information is correct

A response t a properly designed positive confirmation request ordinarily is expected to provide reliable audit evidence. What risk exists?

Exception

A response that indicates a difference between information requested to be confirmed, or contained in the entity's records, and information provided by the confirming party

Cutoff bank statement

A statement covering a specified number of business days ( usually 7 to 10) following the end of the client's fiscal year.

Yes- Standard confirmation form Yes-January 1-10 cutoff statement

An auditor may obtain information on the December 31 month-end balance per bank in which of the following?

Name, Date, Maturity, Amount, Interest Rate and trace to accounting record and to notes themselves.

Analysis of note Receivable and related interest prepared by client

Positive Confirmation Requests

Ask debtor to confirm directly to the Auditors the accuracy of the dollar amount shown on the confirm request

Negative confirmation Requests

Asked to advice Auditors only if balance shown is not correct

Auditor determine "what could cause a material misstatement?" what procedures can we do to identify misstatments?

Assess the risks of material misstatement and design further audit

1. Aged trial balance 2. Analysis of other A/R 3. Analysis of notes receivable & related interest 4. Analysis of allowance for uncollectible accounts and notes 5. Comparative analysis of revenue by month, by product, or by territory or by relating forecasted revenue ot actual revenue 6. Documentation of internal controls 7. Risk analysis & Audit

Audit documentation

External Confirmation

Audit evidence obtained as a direct written response to the auditor from a third party, either in paper form or by electronic or other medium

Schedule of bank transfers

Audit procedure to identify kiting

-Evaluate the reasonableness of accounting estimates related to receivables and the recognition of Revenue

Auditors Evaluate accounting estimates related to revenue recognition

-Unusual pricing -Billing clauses -Delivery clauses -Return clauses -exchange clauses -Acceptance clauses

Auditors should review any significant year-end sales contracts for

Deficiency

Cash collection centralized in the clerk #2 receives the cash (check) from patients and records the cash receipt

1. Information is obtained from electronic data sources, which may not contain all information in the respondent's possession. 2. Information not guaranteed to be accurate nor current and may be matter of opinion 3. The recipient may not rely upon the information in the confirmation.

Certain restrictive language may, however, cast doubt bout the completeness or accuracy of the information contained in the response or on the auditor's ability to rely on such information. What are three examples of such restrictions?

Deficiency

Clark # 2 maintains the accounts receivable records and can add or delete information on the PC

Deficiency

Cler # 2 receives cash and checks and prepare the daily bank deposit.

-Looking fro shipped but not billed -all shipment have been billed

Compare a sample of shipping documents to related sales invoices

Strength

Computer software cannot be modified by southwest's emplouees

Existence

Confirm receivables with debtors

Main Audit test -documentary evidence secured from outside the client organization sent directly to Auditor -Direct communication with Auditors most essential and conclusive steps in the verification of A/R and N/R

Confirm receivables with debtors (Address existence)

Send positive confirmation requests.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balance represent resident's delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence fo the accounts receivable balances at the balance sheet date, Cooper would most likely:

Review and assess an aging schedule of accounts receivable

Determine that accounts receivable are valued at their realizable valued at their net realizable value.

Read the financial statements (including notes) for completeness.

Determine that proper receivable disclosures are presented.

-In accordance with GAAP -Disclose related parties -Nature of relationship -Amount of transaction

Evaluate financial statement presentation and disclosure of receivables & revenue

Estimates Auditors

Evaluate the reasonableness of accounting estimates related to receivables and the recognition of Revenue

-Review constraction of completion -client customers significant amount of revenue -Auditor examine evidence of revenue approval of estimated

Examine evidence of review and approval of revenue estimates

-Sales returns -Allowance for bad Debt -% of completion Revenue

Example of Estimates

All responses carry some risk of interception, alteration, or fraud

Factors that may indicate doubts about the reliability of a response include what?

Pledged

Financial statement confirmation description of collateral security bank loan

Sales department

For effective internal control, the billing function should not be performed by the:

Write-off must be approved by a responsible official after review of credit department recommendations and supporting evidence.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:

1.inquire about management's reasons for the refusal and seek audit evidence abut their validity and reasonableness 2. Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of material misstatement, including the risk of fraud, and on the nature, timing, and extent of other audit procedures 3. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

If management refuses to allow the auditor to perform external confirmation procedures, the auditor should do what?

Asses risk if it is higher or lower

If necessary, revise the risks of material misstatements based on the results of test of controls

Is responsible for mailing the checks

In testing controls over cash disbursement, the auditors most likely would determine that the person who signs checks also:

Should perform alternative audit procedures to obtain relevant and reliable audit evidence

In the case of each nonresponse, the auditor should do what?

Strength

Insurance coverage for patients is verified and communicated to the clerks by the office manger before medical services are rendered

-Consideration of controls -in some cases, the confirmation of accounts receivable

Interim Audit Work may consist of

Kiting

Jones embezzled $10,000 account in Bank A. At year-end, he hid the shortage by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction on the books. This is example of:

Kitting

Manipulation that utilize such temporarily overstated bank balances to conceal a cash shortage or meet short-term cash needs

Strenght

None of the employees who perform duties in the revenue generating and revenue recording are able to write checks.

1. Narrative 2. Internal Control questionnaire 3. Flow chart 4. Walk through( yes or no question- if it is no, it is risk)

Obtain and understanding of internal control over Receivables & Revenue by:

Verify reconciling items on the year-end bank reconciliation

Obtain bank cutoff statements.

Description of Misstatement

Overestimation of the amount of revenue earned.

Strength

Prenumbered service slips and accounted for on a monthly basis by the outside accountant who is independent of the revenue generating and revenue recording functions.

Reconcile cash receipt and disbursement totals between company records and bank

Prepare a bank a four-column proof of cash

Detect Kiting

Prepare a bank transfer schedule

-Substantial amount of sales for cash compare, select daily totals in seller journal with the cash register readings or Tapes

Reconcile selected cash register tapes and sales tickets with sales

Processes cash disbursements

Reconciliation of the bank account should not be performed by an individual who also:

1. Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability or warranty express or implied. 2. The reply is given solely for the purpose of the audit without any responsibility on the part of the respondent,its employees, or its agents, and it does not relive that auditor from any other inquiry or the performance of any other duty

Restrictions that appear to be boilerplate disclaimers of liability may not affect the reliability of the information being confirmed. what are two examples of such disclaimers?

The presentation and disclosure of receivables are adequate

Review drafts of financial statements, Disclosure

Recorded receivables are at appropriate net realizable value

Review the aged trial balance for significant past due accounts,

Identify related party transactions.

Search for large checks to directors, officers, and employees.

Correct

Second request are ordinarily sent for positive form confirmations requests when the first request is not returned

Compare sto 9/30/X5 general ledger.

Select 1 Procedure for Balance per books

Inspect bank credit memo

Select 1 Procedure for customer note collected by bank

1. Confirm directly with bank 2. Trace items on the bank reconciliation to cutoff

Select 2 procedures for Balance per bank

1. Inspect bank credit memo 2. Trace items on the bank reconciliation to cutoff statement.

Select 2 procedures for Error: check# 1282 written on 9/26/x5 for $270 Was recorded as $720

1. Trace to cash receipts journal 2. Ascertain reason for unusual delay. 3. Inspect supporting documents for reconciling item not appearing on cutoff statement. 4. Trace items on the bank reconciliation to cutoff statement. 5. Trace items on the cutoff statement to bank reconciliation.

Select 5 procedures for Deposits in transit

1. Trace to cash receipts journal 2. Ascertain reason for unusual delay. 3. Inspect supporting documents for reconciling item not appearing on cutoff statement. 4. Trace items on the bank reconciliation to cutoff statement. 5. Trace items on the cutoff statement to bank reconciliation.

Select 5 procedures for outstanding checks

Neither

Southwest extends credit rather than requiring cash or insuranace in all cases.

Neither

Southwest is involved only in medical service and has not diversified its options.

-customer purchase order -clients sales orders -Sales Invoice -Trace the shipping documents

Test of controls

-The overall account balance is immaterial -external confirmation procedures would be ineffective, or -the auditor's assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.

The auditor is required to consider whether external confirmation procedures are to be performed as substantive audit procedures and is required to use external confirmation procedures for accounts receivable unless what?

1. the auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion. 2. the population of items subject to negative confirmation procedures comprises a large number of small, homogeneous account balances, transactions, or conditions. 3. A very low exception rate is expected 4. The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests

The auditor should not use negative confirmation requests as the sole substantive audit procedure to address an assessed risk of material misstatement at the assertion level, unless what is present?

And account receivable are immaterial, or the use of confirmations would be ineffective.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low

Details of bank deposit slips with details of credits to customer accounts.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the:

Strength

The bank reconciliation is prepared monthly by the outside accountant who is independent of the revenue generating and revenue recording functions.

correct

The confirmation requests should be mailed to respondents by the CPAs.

A new CFO is redesigning Anthony co's accounting policies and procedures

The existence of which of the following is most likely to increase audit risk in an audit client?

Deficiency

The office manager approves the extension of credit to patients and also approves the write-offs of noncollectable patient receivable

Deficiency

The office manager extends credit on case-by-case basis rather than using formal credit search and established credit limits

Strength

The physician who renders the medical services documents the services on prenumbered slip that is used for recording revenue and as a receipt for the patient.

1. Audit evidence is more reliable when it is obtained from independent sources outside the entity. 2. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. 3. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic, or other medium.

The reliability of audit evidence is influenced by its source and nature and is dependent on the individual circumstance under which is obtained, what are the tree generalizations applicable to audit evidence as it relates to external confirmations?

Shipping document file

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

General Ledger

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following ecept:

1.Cutoff bank statement 2. Year-end bank statement 3. bank confirmation

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following:

Stamped "paid" by the check signer

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:

Accounts receivable subsidiary ledger.

To test the existence assertion for recorded receivables, the auditors would select a sample from the:

Billed sales were shipped.

Tracing copies of sales invoice to shipping documents will provide evidence that all

Verify year-end cash and liability balance information.

Use standard confirmation form to confirm account balance information.

Compensation arrangement that are based on recorded revenue

Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to receivables and revenues

Perform tests of subsequent cash receipts after the balance sheet date

Verify existence of accounts receivable

Examine shipping documents and /or subsequent cash receipts

We mailed the check for this on December 31

Is to design and perform such procedures to obtain relevant and reliable audit evidence.

What is the objective of the auditor, when using external confirmations?

Completeness

Which assertion relating to sales is most directly addressed when the Auditors compare a sample of shipping documents to related sales invoice?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Separating cash handling from record keeping Centralizing the receipt of cash Depositing cash each day's receipts intact.

Which of the following is a control that generally is established over cash transactions?

Theft of cash register sales

Which of the following is an example of misappropriation of assets relating to sales?

Over-recorded sales due t a lack of control over the sales entry function.

Which of the following is least likely to be considered an inherent risk relation to receivables and revenues?

Physically examine items sold.

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation request?

Recording sales when the customer is likely to return the goods

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Obtaining a receipt for every disbursement

Which of the following is not a control that generally is established over cash transactions?

Separate record keeping from accounting for cash to the extent possible.

Which of the following is not a universal rule for achieving internal control over cash?

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

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

To insure accurate posting, the accounts receivable clerk should post the customer's receipts from customer's checks.

Which of the following is not control that generally is establish over cash receipt?

Prepare a schedule of bank reconciliations.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting?

Observe the consistency of the employee's use of cash registers and tapes

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?

Inflated sales for the year

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

Assess the allowance for noncollectable accounts for reasonableness

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

1.Deposit each day's cash receipts intact. 2. Separate cash handling from record keeping. 3.Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks

Which of the followings are part of universal rule for achieving internal control over cash?

Receive a cutoff statement directly from the client's bank

Which procedure is an auditor most likely to use to detect a check outstanding at year-end that was not recorded as outstanding on the year-end bank reconciliation?

An oral response to a confirmation request does not meet the definition of an external confirmation because it is not a direct written response to the auditor.

Why doesn't an oral response meet the definition of an external confirmation?

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

You have been assigned to the year-end of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to:

Not an exception, no further audit work is neccessary.

You received no replay to a negative confirmation request to Adams Co.

Examine shipping documents and /or subsequent cash receipts

You received no reply to positive confirmation request to Blake co. subsequently you recalled that Blake co. has a policy of not responding to confirmations-in writing or orally.

Fraud: Recording sales when the customer is likely to return the goods

ineffective board of directors, audit committee, or internal audit function; "tone at the top" not conducive to ethical conduct, undue pressure to meet sales target.

A bank lockbox system

which of the following controls would be most likely to reduce the risk of diversion of customer receipts by a company's employees?

Examine cash receipts received after year-end

which of the following is a likely procedure to test the adequacy of allowance for doubtful accounts?