Acct 402: Ch 11- Accounts Receivable, Notes Receivable, and Revenue

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

Shipping documents file

Confirming Party

The individual who responds to the confirmation request. Responses to confirmation requests provide more relevant and reliable audit evidence when the confirmation requests are sent to confirming parties who the auditors believe are knowledgeable about the information to be confirmed. For example, an individual in accounts payable may provide more relevant and reliable audit evidence with respect to a client's receivable balance than an individual who has no direct access to accounts payable records.

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

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

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

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

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

Assess the allowance for uncollectible accounts for reasonableness

A CPA firm wishes to test the client's sales cutoff at June 30, 20X0. Describe the steps that the auditors should include in this test.

1. Select. a sample of shipping records and compare with sales invoice 2. Select a sample of sales invoices from which are recorded in the last few days of June and first week of July 3. Determine COG, sales and sales return have been recorded in the proper period. 4. Review sales returns cut off and allowances and determine that a consistent policy has been followed.

What alternative auditing procedures may be undertaken in connection with the confirmation of accounts receivable where customers having substantial balances fail to reply after second request forms have been mailed directly to them?

1. Send further requests by registered mail along with return receipt requests 2. Auditors may make a phone call to determine balance or ask the reason for not receiving a reply to written request. 3. Auditors may also send request by fax, in some situations 4. Auditors may examine any payments to the account that have been made subsequent to the balance sheet date. May also examine shipping records, duplicate invoice and bills and purchase orders for the transaction to determine the amount.

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.

Channel Stuffing

A marketing practice that suppliers sometimes use to boost sales by inducing customers to buy sustainability more inventory than they can promptly resell. Channel stuffing without appropriate provisions for sales returns is an example of booking tomorrow's revenues today in order to window dress the financial statements

Confirmation request

A request sent to a confirming party requesting that the confirming party consider the accuracy of information included in that request. A confirmation request may take one of two forms: positive confirmation request and negative confirmation request.

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.

Negative confirmation request

A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request.

Explain the difference between a customer's order and sales order, as these terms might be used by manufacturing company making sales on credit

A sales order is a translation of the terms of the customer's order into a set of specific instruction for the guidance of various divisions including the credit, finished goods stores, shipping, billing and accounts receivable units.

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

Accounts receivable subsidiary ledger

Window Dressing

Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.

Several Accounts Receivable confirmations have been returned with the notation, "Verification of vendors' statements are no longer possible because of our data processing system." What alternative auditing procedures could be used to verify these accounts receivable?

Alternative auditing procedures that can be used include: 1. Examination of client invoice 2. Duplicate shipping documents 3. Examination of purchase order of customer or contract 4. Assessment of payment received from customers until balance sheet date

External Confirmation

Audit evidence obtained by the auditors as a direct written response to the auditors from a third party (the confirming party) in paper form or by electronic or other medium (e.g., the auditors' direct access to information held by a third party).

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

Completeness

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

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

Side Agreements

Formal or informal modifications of normal terms and conditions of sales transactions to entice customers to accept delivery of goods or services.

In connection with an audit, what are the purposes of a review of sales returns and allowances subsequent to the balance sheet date?

If sales returns or allowances are excessive, then it might indicate to the shipments made without sutlers orders, weaknesses in IC, shipments of defective goods, a misstatement of sales/receivables/inventory. One reason of analysis of sales closer to balance sheet date is to expose any facts which require adjustment of inventories, sales or receivable in the accounts being audited. Another reason is to check the effectiveness of the internal control system.

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

Inflated sales for the year

In selecting accounts receivable for confirmation, the auditors discover that the client's company records show the addresses of many individual customers to be post office boxes. What should be the auditors' reaction to this situation?

Investigate the existence of customers. They should investigate if the accounts are fictitious and whether dishonest employees have committed fraud.

Explain why the audit of revenue and receivables may present the auditor with significant audit risk

Most of the risks involving receivables and revenue include inherent risks and fraud risks. Examples are: * A decline in sales due to economic declines, product obsolescence, increased competition, or shifts in product or service demand. * Inability to collect receivables * Improper revenue recognition * Restrictions placed on sales by laws and regulations.

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

Over recorded sales due to a lack of control over the sales entry function

Management review controls

Reviews conducted by management of estimates and other kinds of financial information for reasonableness. They often involve the use of significant judgement, knowledge, and experience in comparing recorded amounts with expectations of the reviewers. They may relate to any of the COSO components that have the common characteristic of involving management review of information to identify misstatements or breakdowns in other controls

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:

Send positive confirmation requests

State briefly the audit objectives that are addressed by the following audit procedure: "Confirm accounts receivable and notes receivable by direct communication with debtors."

The objective of the billing process is to notify the customer of the amount due for goods or services delivered. A most important document created by the billing department is the sales invoice. The original is sent to the customer, and copies are used to record accounts receivable and sales.

Your review of notes receivable from officers, directors, stockholders, and affiliated companies disclose that several notes of small amounts were written off to the allowance for uncollectible notes during the year. Have these transactions any special significance? Explain.

The write off of several small amounts from these parties is irregular and unacceptable. All related party transactions should be investigated by auditors.

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

Theft of cash register sales

Interim audit work

Those audit procedures that are performed before the balance sheet date. The purpose is to facilitate earlier issuance of the audit report and to spread the auditors' work more uniformly over the year.

pledging receivables

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

Bill and hold transactions

Transactions in which sales of merchandise are billed to customers prior to delivery, with the goods being held by the seller. These transactions may overstate revenues and net income if they do not meet specific requirements for recognition as sales

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:

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

Fidelity Bond

a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. Fidelity bonds usually insure a business for losses caused by the dishonest acts of its employees


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