Audit CH.10
The creditworthiness of a customer should be documented on a(n) _______ form.
Credit Approval
Substantive analytical procedures are ______.
used to examine plausible relationships among related accounts
Inherent risk may increase due to issues regarding recognition of revenue on ______.
- long-term construction contracts - long-term service contracts - lease contracts - installment sales
The accounts commonly affected by sales transactions are ______.
Trade accounts receivable sales allowance for uncollectible accounts bad debt
True or false: An industry's rate of technological changes can affect the potential for misstatements in this revenue process.
True
Revenues are deemed to be earned when the company has __________ what it must do to fulfill its obligation.
accomplished
When it comes to cash receipt transactions, auditors seldom have major concerns about ______.
classification
Risk factors to an entity's internal controls over the revenue process include ______.
competition rapid growth new tech
If goods are shipped or services are performed and no revenue is recognized, the ______ assertion has not been met.
completion
One way to avoid misstatement of revenue is to ensure the client has proper __________.
cutoff policies
The major audit procedures for testing the _______ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.
existance
The major control for preventing fictitious sales is ______.
proper segregation of duties
Controls for the completeness assertion include ______.
segregation of duties restrictive endorsements use of a lockbox system
Inherent risk factors that may affect the revenue process are ______.
- Industrial-related factors - complexity and contentiousness of revenue recognition issues - difficulty of auditing transactions and account balances - misstatements detected in prior audits
__________ needs to be assured in order to recognize revenue.
collectibility
The major control for preventing cash from being recorded in the wrong account is ______.
chart of account
Receivables from related parties are ______.
confirmed and evaluated for collectibility
To provide evidence on the valuation of the allowance, the auditor looks at the aged trial balance for old items and ______.
considers historical collection to provide evidence of uncolletability for current items
Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed __________.
correctly
According to FASB, in order to recognize revenue an entity must ______. - satisfy a performance obligation - create a contract with a customer to provide a good or service - transfer a good or service to a customer - receive payment for the transferred good or service
- transfer a good or service to a customer - satisfy a performance obligation
The choice of which type of test of controls is appropriate for a particular assertion will be a function of the ______.
- volume of transactions or data - nature and complexity of the systems by which the entity processes and controls information - nature of the available evidence
The accounts commonly affected by cash receipts transactions are ______.
Cash Trade Accounts Receivable Cash Discounts
Which of the following statements are correct? - Confirmation requests should be made soon after the end of the accounting period to maximize the response rate. - Accounts receivable should only be confirmed at year end except in rare circumstances. - Sending confirmations at the end of the accounting period reduces the chance of timing differences.
Confirmation requests should be made soon after the end of the accounting period to maximize the response rate. Sending confirmations at the end of the accounting period reduces the chance of timing differences.
When the auditor does not receive a response to the positive confirmations, possible procedures include ______.
Examination of: - specific subsequent cash receipts - shipping docs - other client docs sending second and third requests
True or false: Misstatements in previous audits are not good indicators that misstatements are likely to be present in the current audit.
False
True or false: Substantive analytical procedures are inadequate audit tests for examining the fairness of revenue related accounts because such tests fail to provide sufficient evidence, even though they are low cost.
False
The use of ______ also reduces the risk of revenue being recorded before goods are shipped or services are performed because customers are unlikely to recognize an obligation to pay in such a circumstance.
Monthly customer statements
The sale of goods and services to customers is the focus of the _____ process.
Revenue
The potential for theft and fraud in the revenue process makes this particularly important.
Segregation of Duties
True or false: Some accounts are difficult to audit because of the lack of reliable evidence.
True
To test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______.
accounts receivables general ledger account
Because revenue transactions that are processed incorrectly result in misstatements that directly affect the amounts reported in the financial statements, _________ is an important assertion.
accuracy
Once the tests of controls in the revenue process have been completed, the auditor sets the ______ level of control risk.
achieved
Side __________ can substantially alter the terms of a sale.
agreements
There are two categories of substantive procedures: (1) substantive _______ procedures and (2) tests of ____ of classes of transactions, account balances and disclosures.
analytical;details
The auditor's decision process for planning and performing tests of controls involves considering the ______ that can occur if internal control does not operate effectively.
assertions and the possible misstatements
Receivables that have been sold should not remain as a(n) __________ on the company's books.
asset
It is the responsibility of ______ to ensure that all necessary financial statements disclosures are made.
auditors
Shipping goods to customers with bad credit and making sales at incorrect prices or terms are both possible misstatements due to improper ______.
authorization
Confirmations do not necessarily mitigate the risk of __________.
bad debt
Failure to perform the credit authorization function properly may result in ______.
bad debt losses
Reconciling the daily remittance report to control listings of remittance advices provide reasonable assurance that ______.
cash receipts were recorded at the correct amounts
One control activity that can provide assurance for _______ the assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.
classification
One control activity that can provide assurance for the _______ assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.
classification
One of the major issues related to ________ of accounts receivables is segregating short-term and long-term receivables.
classification
The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ________ assertion.
classification
A major misstatement related to the ______ assertion is that cash or checks are stolen or lost before being recorded in the cash receipts records.
completeness
When it comes to cash receipt transactions, auditors seldom have major concerns about ______.
cutoff
Important controls regarding the processing of credit memoranda are ______.
each credit memorandum should be approved by someone other than the individual who initiated it a credit for returned goods should be supported by a receiving document indicating that the goods have been returned
The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______.
entity interception of the confirmation alteration of the confirmation by the entity
To test for proper authorization of early payment discounts, the auditor can ______.
examine a sample of cash receipts transactions to determine if the entity's cash discount policies are being followed
One of the more important assertions regarding accounts receivables is ________ because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts.
existance
True or false: Auditors normally test the cutoff assertion by conducting tests of controls only.
false
When the results of testing controls do not support the planned level of control risk, detection risk will ______.
have to be set lower
If there is a dispute between the auditor and management over when revenue should be recognized, the auditor should assess the risk of material misstatement as ______.
high
The accounting standard regarding revenue requires an entity to follow a five-step approach. The first step it to ______.
identify contractual agreement(s) with a customer
Management may have fraudulently overstated revenue by making __________ journal entries.
inappropriate
The assessment of the potential effects of _______ risk factors is one of the inputs for the assessment of the risk of material misstatement.
inherent
Audit procedures used to test controls in the revenue process include ______.
inquiry of personnel inspection of documents and records observation of the operation of the control walkthroughs reperformance of the control activities
For virtually all entities, the _______ and ________ processes represent the two major business processes than affect the financial statements.
inventory and purchasing
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
There is only a small possibility of cash being recorded in the wrong period if the entity uses a(n) ______ system.
lockbox
For control of the confirmation process, the auditor should ______.
mail the confirmations in envelopes with the public accounting firm as the return address mail the confirmations outside the entity's facilities send return envelope addressed to the public accounting firm
The possible misstatement that concerns the auditor when considering the ______ assertion is that cash receipts are recorded but not deposited in the entity's bank account.
occurrence
There are two types of confirmations:
positive and negative
For entities that have specialized revenue or services that require separation, controls over the aggregation or disaggregation of transactions are paramount for proper ______.
presentation
Industry related factors that affect the potential for misstatements in the revenue process include ______.
profitability and health of industry level of competition rate of technological change
Sending confirmation requests at the end of the accounting period ______.
reduces the chance of timing differences maximizes response rate
Many instances of misstatement are based on the inappropriate recognition of __________.
revenue
One of the most important controls in any accounting system is proper _____ of _______ .
segregation of duties
Possible misstatements due to improper authorization of revenue transactions include ______.
shipping goods to or performing services for customers who are bad credit risks and making sales at unauthorized prices or terms
Management's estimate for the allowance for uncollectible accounts and sales returns can be difficult to audit because of the ______ that may be involved in determining proper value.
subjectivity
To examine the fairness of revenue related accounts, ________ procedures are useful audit tests because they provide sufficient evidence at low cost.
substantive analytical
When using a reliance strategy, the auditor conducts ______ to ensure that the controls in the revenue process operate effectively.
tests of controls
Possible programmed controls to ensure accuracy of the revenue process include ______.
the authorized price list is updated promptly only authorized changes are made to the master file
True or false: Related-party transactions is a common disclosure for revenue-related accounts.
true
True or false: Understanding management's attitudes towards risk relevant to the revenue process is an important component of assessing the control risk for the revenue process.
true
The major _______ issue related to accounts receivable is concerned with the net realizable value of accounts receivable.
valuation
For a positive confirmation, a response is required ______.
whether the amount is correct or incorrect
The major issues related to the classification for accounts receivable are ______.
- IDing and reclassifying any material credits contained in AR. - Segregating short-term and long-term receivables - ensuring that different types of receivables are properly classified
Auditing standards allow the auditor to omit confirming accounts receivable when ______.
- The balance is immaterial - External confirmations would be ineffective - Assessed level of risk of material misstatement at the relevant assertion level is low, and other planned substantive procedures address the assessed risk
Which of the following statements are correct? - Many accounting systems integrate purchasing and human resources with revenue. - The revenue process is similar for all types of organizations. - In most systems the revenue process does not interact with the inventory management process.
- The revenue process is similar for all types of organizations. - Many accounting systems integrate purchasing and human resources with revenue
A credit approval form ______.
- documents a customer's creditworthiness - is an example of a source doc
If an auditor does not receive responses to positive confirmations ______.
additional requests can be sent
Credit memoranda that are used to process sales returns and allowance transactions ______.
also used to cover an unauthorized shipment of goods or conceal a misappropriation of cash
Having cash or checks stolen or lost before being recorded in the cash receipts records is a major misstatement related to the ________ assertion.
completeness
The auditor's concern with the _______ assertion over accounts receivable is whether all accounts receivable have been included in the subsidiary ledger and the general ledger account.
completeness
Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices.
completion
Audit evidence that is a direct written response from a third party to the auditor, in paper form or by electronic or other medium is called _______.
confirmation
Determining that the customer is able to pay for the goods or services is the role of the _____ ______ function.
credit approval
Overstatement may occur when sales for the next period are recorded in the __________ period.
current
Comparing the date of a bill of lading with the date on the respective sales invoice and the date the sales invoice was recorded in the sales journal allows the auditor to test the _____ control.
cutoff
Comparing the date of a bill of lading with the date on the respective sales invoice and the date the sales invoice was recorded in the sales journal allows the auditor to test the ______ control.
cutoff
If the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. This relates to the ______ assertion.
cutoff
The attempt of the _______ assertion is to determine whether all revenue transactions and related accounts receivable are recorded in the proper period.
cutoff
The results of the auditor's testing of internal control for the revenue process directly impact ______ risk and therefore the level of ______ procedures that will be required for the accounts affected by this process.
detection; substantive
__________ communication with debtors is the most conclusive step in verifying accounts receivable.
direct
A common control to ensure proper presentation is the use of a(n) ______ checklist.
disclosure
Many accounting systems integrate the revenue process with the human resources, _______ and ______ processes.
inventory, purchasing
If the aggregate misstatement is ______ the tolerable misstatement, the auditor may accept the account as fairly presented.
less than
The presence of misstatements in previous audits suggests that misstatements are ______ to be present during the current audit.
likely
The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ______ assertion.
classification
The auditor should document the achieved level of control risk for the revenue process using ______.
either quantitative amounts or qualitative terms
A strong control that prevents misstatement of cash receipts is the use of a(n) _____ system where customers mail payments directly to the entity's bank account.
lockbox
AR confirmations can be sent electronically or via __________.
paper form