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:
