Auditing 2 Exam 1

Non-response

A failure of the confirming party to respond or fully respond to a positive confirmation request or 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 they agree or disagree with the information in the request

Exception

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

Purchase order (client approval) Invoice (vendor) Receiver (receiving department)

Accounts payable requires a three way Match of what

Standard confirmation form- yes Jan 1-10 cutoff statement- yes

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

External confirmation

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

Overall account balance is immaterial External confirmation procedures would be ineffective Auditors assessed level of risk material miss statement at relevant assertion level is low and other planned substantive procedures address the assessed risk

Auditor is required to use external confirmation procedures for account receivable unless:

Are charged on the bank but not on the box

Bank charges...

Are deposited on the bank but not on the book

Bank credits...

Are an error on the bank but not on the book

Bank or deposit or errors...

Debit to bank service expense, credit to cash

Bank service charge journal entry

General cash, branch bank accounts, payroll, and petty cash

Cash normally include:

Send a positive confirmation requests

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residence 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:

Are on the books in the first month but not on the bank. The next month, they are not on the books but on the bank

Deposits in transit...

Debit to cash, credit two accounts payable

Error in recording check where check was written for an amount that is less than the accounts payable journal entry

Sales department

For effective internal control, the billing function should NOT be prepared by the:

Write offs 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 accounts receivable

Understatement

In a schedule a bank transfers, 2 no's mean

Overstatement

In a schedule of bank transfers, two yeses means

It's OK

In schedule a bank transfers, one yes and one no means

Is responsible for mailing the checks

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

Debit to cash, credit interest revenue

Interest collected by bank journal entry

Kiting

Jones embezzled $10000 from his company's account in bank A. At year end he hid the shortage by making a deposit on December 31 in bank B. He has NOT recorded the transaction on the books. This is an example of:

Debit two accounts receivable, credit to cash

NSF check returned journal entry

On a bank but not on books

NSF check returned...

Are charged on the book but not on the bank. The next month they are charged on the bank but not on the book

Outstanding checks...

Valuation

Primary audit objectives for determining adequacy of allowance for uncollectible accounts

Presentation and disclosure

Primary audit objectives of ascertaining the evidence of pledged receivables and investigating receivables from related parties

Existence, occurrence, and rights, valuation and accuracy

Primary audit objectives of confirming receivables with the debtors

Presentation and disclosure

Primary audit objectives of evaluating financial statement presentation and disclosure

Valuation and accuracy presentation and disclosure

Primary audit objectives of evaluating the business purpose of significant and unusual sales transactions

Valuation and accuracy

Primary audit objectives of evaluating the propriety of clients accounting for transactions and evaluating accounting estimates related to revenues

Existence, occurrence, and rights

Primary audit objectives of inspecting notes on hand and confirming those not on hand

Valuation and accuracy

Primary audit objectives of obtaining age listing of receivables and reconciling two letters. Obtaining analysis of notes receivable and related interest.

Existence occurrence and rights, completeness valuation and accuracy

Primary audit objectives of performing analytical procedures and reviewing significant year end sales contracts

Existence, occurrence, and rights, completeness, cut off

Primary audit objectives of reviewing the year end cut off of sales transactions

Existence, occurrence, and rights, completeness

Primary audit objectives of verifying interest earned on notes receivable

Processes cash dispursements

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

Negative confirmation request

Request for confirming party respond directly to Autre only if confirming party disagrees with the information provided in the request

Trace items on the bank reconciliation to cut off statement Trace items on the cut off statement to bank reconciliation Trace to cash receipts journal Ascertain reason for unusual delay Inspector supporting documents for reconciling item not appearing on cut off statement

Select five procedures: deposits in transit

Trace to cash disbursements journal Ascertain reason for unusual delay Inspector supporting documents for reconciling item not appearing on cut off statement Trace items on the bank reconciliation to cut off statement Trace items on the cut off statement to bank reconciliation

Select five procedures: outstanding checks

Compared to 9/30/X5 general ledger

Select one procedure: balance per books

Inspect bank credit memo

Select one procedure: customer note collected by bank

Confirm directly with bank Trace items on the bank reconciliation to cut off statement

Select two procedures: balance per bank

Trace items on the bank reconciliation to cut off statement Inspected bank Credit memo

Select two procedures: error: check number 1282; written on 9/26/X5

1. The auditor has assessed risks as low and obtain sufficient audit evidence of controls 2. Population of items subject to negative confirmation procedures is a large number of small account balances, transactions, or conditions 3. A very low exception rate is expected 4. Auditor is not aware of circumstances that would cause recipients to disregard request

The Autre should use positive confirmation request unless...

Accounts receivable are in material or the use of confirmations would be ineffective

The auditor should confirm accounts receivable unless the auditors assessment of the risk of material miss statement is low and

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

The auditors suspect that a clients 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:

A new CFO is redesigning Anthony companies accounting policies and procedures

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

Shipping documents 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 EXCEPT:

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:

Billed sales were shipped

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

True

True false: the confirmation request should be mailed to respondents by the CPAs

False

True or false: a combination of positive and negative request forms must be used if receivables are significant

False

True or false: auditor should always confirm the total balances of accounts rather than individual portions

True

True or false: auditors may ignore individually immaterial accounts when confirming accounts receivable

True

True or false: confirmation of accounts receivable is a generally accepted auditing standards

True

True or false: confirmations address existence more than they address completeness

True

True or false: second requests are ordinarily sent for positive form confirmation requests when the first request is not returned

True

True or false: the auditors ordinarily should confirm accounts receivable

1. Inquire about managements reasons for refusal and seek audit evidence about the validity and reasonableness 2. Evaluate implications of management's refusal on auditors assessment of relevant risks, fraud, and On nature timing and extent of other procedures 3. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence

Watch the Audrey do if management refuses to allow the auditor to perform external confirmation procedures?

1. Information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability or warranties expressed or implied 2. Reply is giving a Soli for purpose of audit without responsibility of respondents, employees or agents and does not relieve auditor from any other inquiry or performance of other duty

What are examples of boilerplate disclaimers of liability?

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

What are examples of restrictive language on confirmations?

Whether it was received by the auditor in directly or if it appeared not to come from the originally intended confirming party

What are factors that may indicate doubts about the reliability of a response?

1. Audit evidence is more reliable when obtained from independent sources 2. Audit evidence obtained directly by auditor is more reliable than evidence obtained indirectly 3. Audit evidence is more reliable when it exists in documentary form

What are the three generalizations applicable to audit evidence as it relates to external confirmations?

Review drafts of financial statements. Disclosure.

What audit procedure would be used When the presentation and disclosure of receivables are adequate

Trace a sample of sales invoices from late in December to the sales journal and to postings in Accounts Receivable and sales accounts

What audit procedure would be used when all receivables that should be recorded are recorded as of year-end

Review the aged trial balance for significant past due accounts

What audit procedure would be used when recorded receivables are at appropriate net realizable value

Vouch year end account receivable balances to supporting documents

What audit procedure would be used when recorded receivables exist

Vouch year end Accounts receivable balances to supporting documents

What audit procedure would be used when the client has rights to recorded year end receivables

Re-performance

What audit procedure? Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list

Analytical procedure

What audit procedure? Compared total bad debts this year with the totals for the previous two years

Inspection of records or documents

What audit procedure? Examine a sample of sales invoices to see if they were initialize by the credit manager indicating credit approval

Inspection of records or documents

What audit procedure? Examined invoice to obtain evidence in support of the ending recorded balance of a customer

Inquiry

What audit procedure? Question management about likely total uncollectible accounts

Substantiative procedures

What classification of audit procedure is an analytical procedure

Substantive procedures

What classification of audit procedure is an inquiry?

Substantive procedures

What classification of audit procedure is inspection of records or documents?

Test of controls

What classification of audit procedure is observation

Test of controls

What classification of audit procedure is reperformance?

Concealing a shortage by having one check in 2 banks

What is kiting?

To compare cash in the general ledger to the bank statement

What is the goal of a bank reconciliation?

Verify reconciling items on the year end bank reconciliation

What is the primary objective of the procedure: obtain bank cut off statements

Detect kiting

What is the primary objective of the procedure: preparing a bank transfer schedule

Reconcile cash receipt and disbursement totals between company records and bank records

What is the primary objective of the procedure: preparing a four column proof of cash

Identify related party transactions

What is the primary objective of the procedure: search for large checks to directors, officers, employees

Verify year end cash and liability balance information

What is the primary objective of the procedure: use a standard confirmation form to confirm account balance information

To disclose overstatement of cash balances resulting from kiting

What is the purpose of analyzing bank transfers?

substantive procedures

What kind of audit procedure is a confirmation?

Confirmation

What kind of audit procedure? Requested responses directly from customers as to amounts due

A written narrative, a flow chart, or internal control questionnaire

What might an auditor use when obtaining an understanding of internal control over cash

Observation

What other procedure? Watched the accounting clerk record the daily deposit of cash receipts

Confirming party may reply to the confirmation request without verifying that the information is correct

What risks exist with a properly designed positive confirmation request?

Perform alternative audit procedures to obtain relevant and reliable audit evidence

What should Autre do in the case of a non-response?

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

What should you do if a customer replies "We also owe for two more invoices for purchases we made around your end. I'm not sure of the exact date"

Exception; propose an adjustment

What should you do if a customer replies "we were turned those goods on December 2 and "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

What should you do if a customer replies "well that's what we owe, we didn't know what I December 31 since we didn't receive the goods until January 2 of year to"

Not an exception. No further audit work is necessary

What should you do if customer Does not reply to a negative confirmation request

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

What should you do if customer replies "we are very satisfied with Gelco and plan to purchase from them in the future"

Examine shipping documents and or subsequent cash receipts

What should you do if customer replies "we mailed the check for this on December 31"

Examine shipping documents and or subsequent cash receipts

What should you do if you received no reply to a positive confirmation request to Blake company. Subsequently recalled that Blake company has a policy of not responding to confirmations in writing or orally

Read of the financial statements including notes for completeness

What substantial up test would most likely provide support for the objective of determining the proper receivable disclosures are presented

Perform tests of subsequent cash receipts after the balance sheet date

What substantiative test would most likely provide support for the objective of verifying existence of accounts receivables

Look at shipping documents to make sure. Not a legitimate AR

What would you do?: No way forget it. Company said we'd have these goods in 10 days on December 2. When we didn't receive them I cancel the order on December 12. The other company shipped a similar goods overnight. Will never deal with the company again as long as I am around

Legitimate AR. Just a timing issue.

What would you do?: Our record show that we sent them a check for the amount due on December 29.

Cannot tell. Check the address and resend to correct address. Company might be out of business

What would you do?: The confirmation was returned by the Postal Service as "return to sender, address unknown"

Legitimate AR. Check to make sure we got the checks

What would you do?: We mailed that check for the full amount on January 3. The merchandise was not received until December 23

Not legitimate AR. Determine the terms of the sale.

What would you do?: We receive $24,000 worth of goods on consignment from company on February 10. But they are not sold yet

Not Enough information to tell. Use alternative procedures. Send another request with more detailed information

What would you do?: We use a voucher system by individual invoice. We cannot verify the balance, but company is one of our regular suppliers. We probably owe them something.

Not legitimate AR because they have the right to return. So it's not a sale. Look at terms of sale

What would you do?: Yes I guess we owe this amount, but the company made clear to us that we could return any of the items we did not sell. But so far sales are good and we've sold most of the items.

Not legitimate AR. Possibly fraud. Send that other company a confirm now

What would you do?: Yes we ordered $20,000 worth of merchandise from the company in November. However, we mailed the company a check for $20,000 on December 18. Note: check was received and deposited on 12-28, but posted to the wrong customer's account

Depends on shipping agreement. Is it FOB destination or FOB shipping point? Look at shipping records

What would you do?: Yes we ordered $42,000 worth of merchandise on October 15 but the company was out of stock until recently. They seem to always be out of stock. We finally received the goods on January 4.

Overstatement

When something happens before the end of the year and everything else is recorded afterwords, it results in one yes and one no which means

Completeness

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

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?

A bank lockbox system

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a clients employees?

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 affective internal controls in the revenue cycle?

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?

To insure accurate posting, the accounts receivable clerk should post the customers receipts from customers checks

Which of the following is NOT a control that generally is established over cash receipts?

Obtaining a receipt for every disbursement

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

Separate recordkeeping from accounting for cash to the extent possible

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

Examine cash receipts received after year end

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

Theft of cash register sales

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

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

Which of the following is least likely to be considered an inherent risk relating 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 not applies 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?

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 should be recognized?

Prepare a schedule of bank transfers

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 employees use of cash registers and tapes

Which of the following procedures would the auditors most likely perform to test controls relating to managements 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 clients sales cut off?

Assess the allowance for uncollectible accounts for reasonableness

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

Receive a cut off statement directly from the clients 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?

Because it is not a direct written response to the auditor

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

Review and assess an aging schedule of accounts receivable

Wide substantive test would most likely provide support for the objective of determining that accounts receivable are valued at their net realizable value

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

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