Accounting 492 Exam 2
A malicious program attaches itself to the payroll program and inappropriately modifies it to issue 300 checks for each employee overriding item count and limit controls
Antivirus software
In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: a. What type of sampling plan should the auditors use for this test?
Attributes sampling
Who sends AR & AP requests?
Auditor sends third parties, such as banks or suppliers, asking them to confirm certain financial information.
Merits attention, less than a material weakness
Significant deficiency
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 2. How should the auditors mitigate the risk associated with both very large and very small balances?
Stratification would mitigate the risks associated with a diverse population.
GAAP
Suitable criteria
A senior systems programmer left the company and since that time causes of breakdowns in the system have become difficult to address as no one seems to be able to understand the programs that programmer worked on and developed.
Systems documentation
Inquire, inspect, observe, reperform
Tests of controls
In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: b. Using the appropriate table or formula from this chapter, compute the required sample size for the test.
The appropriate table for determining sample size is illustrated in Figure 9-4. Using the row for a 2 percent expected deviation rate and the column for a tolerable deviation rate of 8 percent, we find a required sample size of 77 items, with 2 allowable deviations
Follow a transaction through the system
Walk through
Property tax payments are typically ______ in number.
few
Management may have fraudulently overstated revenue by making __________ journal entries.
inappropriate
Sometimes auditors may ____ securities on hand.
inspect
Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________.
kiting
Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of __________.
lapping
To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.
large
Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.
liability
When testing customer deposits, auditors typically review a(n) ______of the individual deposits.
list
When auditors find unrecorded liabilities, before adjusting they must consider_______.
materiality
After testing internal controls related to investments, it may be necessary to _______ the risk of material misstatement.
modify
When the auditors estimate sampling risk using professional judgement rather than by using the laws of probability, they are said to be using __________ sampling
nonstatistical
Auditors are often concerned with the ______ of cash as this is where most misstatements occur
overstatement
AR confirmations can be sent electronically or via ________.
paper form
The auditors select an audit sample from the __________ representation of the population
physical
To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider _________.
ratios
Cash analyses need to be _______ to the general ledger.
reconciled
Federal and state governments do not specify the exact ______ to be maintained, but do specify the amounts to be withheld.
records
Cash reconciliations can be tested via __________.
reperformance
One way to avoid misstatement of revenue is to ensure the client has proper ________.
cutoff policies
After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash.
disclosure
_________ sampling is usually used in situations in which the auditors expect a very low rate of occurrence of some critical deviation
discovery
Audit efficiency: Control risk too high
-controls were not designed and operating effectively, so they won't rely on the internal controls. As a result, the audit team would have to lower detection risk and perform more substantive testing procedures. -can result in the auditor's conducting more audit work than necessary in order to reach the correct conclusion
A confidence level of _______ in a control is equivalent to a statement that the risk of assessing control risk too low is .10
.90 (or 90%)
Place the general sequence of steps of the audit process (shown below) in the correct order for an audit of cash. Use the understanding of the client and its environment to consider inherent risks related to cash. Obtain an understanding of internal control over cash. Assess the risks of material misstatement and design further audit procedures (tests of controls). Perform further audit procedures--tests of controls. Perform further audit procedures--substantive procedures for cash transactions and balances
1. Use the understanding of the client and its environment to consider inherent risks related to cash. 2. Obtain an understanding of internal control over cash. 3. Assess the risks of material misstatement and design further audit procedures (tests of controls). 4. Perform further audit procedures--tests of controls. 5. Perform further audit procedures--substantive procedures for cash transactions and balances
Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount of expense incurred on debt but not charged yet by bank
Accrued Interest
Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount estimated to be incurred for utilities unbilled period
Accrued Utilities
Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount estimated to be anticipated for warranty claim of sales already recorded
Accrued Warranty
BACKGROUND: Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 4. What procedures can be performed on customers who do not respond?
Auditors can perform alternate procedures like examining subsequent collections of cash receipts.
A file is damaged by exposure to excessive heat and reconstruction has proven very difficult
Backup support of files
A system in which like transactions are processed periodically as a group
Batch processing
Describe the reason that the auditors are concerned with the completeness of accounts payable
Because the company's financial strength is exaggerated by an understatement of liabilities.
An assistant auditor received the following instructions from her supervisor: "Here is a cutoff bank statement covering the first seven business days of January. Compare the paid checks returned with the statement and dated December 31 or earlier with the list of checks outstanding at December 31." What type of fraud might this audit procedure bring to light? Explain.
Cash shortages are sometimes concealed by intentionally omitting an outstanding check from the year-end bank reconciliation or by understating the amount of one or more outstanding checks. These omitted or understated checks will, however, probably be paid by the bank early in January and returned with the cutoff bank statement. The audit procedure of comparing the paid checks returned with the cutoff bank statement and dated December 31 or earlier with the list of outstanding checks at December 31 would disclose any omissions or understatements in that list.
________ needs to be assured in order to recognize revenue.
Collectibility
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded
Completeness of assets
Describe three ways in which the auditors establish the completeness of accounts payable.
Confirmation of accounts payable. Reconciliation of liabilities with vendor statements. Comparison of cash payments subsequent to the balance sheet date with the accounts payable trial balance. Investigation of unmatched invoices and unbilled receiving reports. Investigation of invoices received subsequent to the balance sheet date.
Likelihood a misstatement will not be prevented or detected
Control risk
Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest An amount paid by a customer for a container to be later returned to the company
Customer Deposit
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Vouch sales and cash receipt transactions occurring near period end
Cutoff of transactions
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Analyze bank transfers occurring at year-end
Cutoff, existence, occurrence, rights, and completeness
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Verify the client's cutoff of cash transactions
Cutoff, existence, occurrence, rights, and completeness
A subject-oriented, integrated collection of data used to support management decision-making processes
Data warehouse
A system that eliminates data redundancy and enforces data integrity by storing data separately from (outside) programs and that contains data for two or more IT applications.
Database system
Computer systems in different locations
Decentralized processing system
__________ communication with debtors is the most conclusive step in verifying accounts receivable
Direct
An environment in which a user department is responsible for developing, or purchasing and running, and IT system (application) with minimal or no support from the central information systems department
End user computing
Label each potential misstatement as either an error or fraud. 4. Recording sales in the wrong period based on the incorrect shipping information.
Error
Label each potential misstatement as either an error or fraud. 5. Revenue earned from franchise is incorrectly calculated
Error
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Obtain analyses of cash balances and reconcile them to the general ledger
Existence and accuracy
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Confirm a sample of receivables by direct communication with the debtors
Existence of assets
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Confirm cash balances with financial institutions
Existence, occurrence, accuracy, cutoff, and rights
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Count cash on hand
Existence, occurrence, accuracy, cutoff, and rights
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Provide a list of related parties to all members of the audit team to assist in identification of the transactions
Financial statement presentation and disclosure of
Unauthorized data is sent and accepted into system from a location external to the firm
Firewall
Label each potential misstatement as either an error or fraud. 1. Intentional overshipment of goods
Fraud
Label each potential misstatement as either an error or fraud. 2. Recording a sale for goods that the customer is anticipated to return
Fraud
Label each potential misstatement as either an error or fraud. 3. Recording a fictitious sale without receiving a customer order for the goods
Fraud
Label each potential misstatement as either an error or fraud. 6. Holding sales journal open to record next year's sales in the current year
Fraud
Substantive procedures and tests of controls
Further audit procedures
Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 1/20 for cleaning services for the month of December; not included in AP as of 12/31
Improperly excluded from AP
Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice received 12/30 for January temporary workers; included in AP as of 12/31
Improperly included in AP
Likelihood of misstatement assuming no controls
Inherent risk
Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure reports tie to client activity
Inspect monthly brokerage reports on securities owned, purchased, and sold
Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Verify that internal auditors' observations are consistent with those of external auditors
Inspect reports by internal auditors on their review of securities and derivates
Reporting on internal control and financial statements
Integrated audit
Unnoticed loss of a transaction during processing of data
Item counts
BACKGROUND: Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 3. Because so many customer balances consist of multiple invoices, what could the auditors do to eliminate unnecessary reconciliation?
Jenner & Jenner CPAs could base their sampling, and hence their confirmations, on confirming invoices, not balances. More confirmations will be sent, but they will be easier to follow up on and reconcile.
Processing a transaction that is unreasonable in amount
Limit test
Creates a reasonable possibility a material misstatement will not be detected
Material weakness
Customers provide incomplete data (omitting a field or more) in ordering goods over the Internet.
Missing data test
In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: c. Assume that the sample indicates four deviations. May the CPAs conclude with a 5 percent risk of assessing control risk too low that the population deviation rate does not exceed the tolerable rate of 8 percent?
No. Since 4 deviations is in excess of the allowable deviations (2) in Figure 9-4, the CPAs know that the upper limit is in excess of 8 percent. Figure 9-5 may be used to determine that when the sample contains 4 deviations the upper limit is 11.8 percent (using the table values for a sample of 75 items).
Access to and alteration of data by an unauthorized system user
Passwords
Several laptops and other devices are stolen
Physical controls over computer equipment
Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Investigate payments to related parties
Presentation and disclosure
Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 1/5 for January security protection; not included in AP as of 12/31
Properly excluded from AP
Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 12/20 for maintenance services and unpaid as of year-end; listed in AP at 12/31
Properly included in AP
Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure policies written are being followed
Review and test reports of investment activity for the investment committee
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Review confirmations of liabilities to determine if receivables have been sold
Rights to assets
Inquiries, analytical procedures, observation
Risk assessment procedures
Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest The amount collected from the customer for a retail sale imposed by the state government
Sales Tax Payable
An error occurs when an invalid account number (one digit is incorrect) is keyed in and accepted by the system
Self checking numbers
Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure transactions are recorded and classified properly
Trace several transactions for purchases and sales of investments through the accounting system
Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Compare the amount of credits given to customers in the subsequent period to the amount estimated by management
Valuation of assets
Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 1. Should Jenner & Jenner CPAs send accounts receivable confirmations?
Yes, audit standards (AU 330) presume that auditors will send accounts receivable confirmations.
Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.
accomplished
Cutoff bank statements include activity for the period _________ the period being audited
after
When searching for unrecorded liabilities, the auditors consider transactions recorded ______ year-end
after
Side _________ can substantially alter the terms of a sale.
agreements
Receivables that have been sold should not remain as a(n) _____ on the company's books.
asset
Cash confirmations need to be mailed under the control of the __________.
auditor
Confirmations do not necessarily mitigate the risk of _________.
bad debt
An important step in testing investments is to ensure all persons with access to investments are properly __________.
bonded
When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.
compare
Accounts payable ________ can be mailed to vendors from whom substantial purchases have been made
confirmations
In performing tests of controls, the auditors are primarily concerned with the risk of assessing ______.
control risk too low
Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.
correctly
Overstatement may occur when sales for the next period are recorded in the _______ period.
current
It is important to verify _____ of both cash receipts and cash disbursements
cutoff
Many instances of misstatement are based on the inappropriate recognition of ________.
revenue
A sample internal control questionnaire question may ask about _________ inherent in the investment policy.
risk
Inherent in the use of sampling is ________ risk which is the possibility of selecting a sample that is not representative of the population.
sampling
When using ________ an item from the population may be selected two or more times for inclusion in the sample
sampling with replacement
Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.
shipping
The term _________ refers to the process of dividing a population into relatively homogeneous subgroups
stratification
Variables sampling plans are typically used for _________ procedures.
substantive
An investment committee is a standing committee of ________.
the board of directors
To use attributes sampling tables, the auditors must stipulate the desired risk of assessing control risk too low, the expected deviation rate in the population, and the desired __________.
tolerable deviation rate
Audit Efficiency: Control risk too low
under-testing substantive procedures, and over-reliance on internal controls and can result in the auditor failing to detect a material misstatement in the financial statements.
It is necessary to _____ the client's cutoff of cash transactions
verify