406 exam 2 ch 10 pt.1
Control Activities and Test of Controls - revenue transactions: types of assertions
ACOCA
_______ - recording of all sales invoice / collection / credit memo in individual customer accounts
AR
seg of duties: o Ppl involved in order entry, credit, billing function should not have access to ________ (3)
AR, GL, cash receipt acivities
plan the evidence we will collect by account and assertion: how much evidence needed = ______ to solve for _____
ARM, detection risk
types of misstatement risks (3)
IR/CR/ fraud risk
plan the evidence we will collect by account and assertion: to plan evidence, 1st need to determine ______ for the cycle, then choose ______
TM, strategy
Thus, a response is required for positive confirmation requests regardless of whether the customer believes that the __________. A negative confirmation requests that the customer respond only when_______
amount is correct or not, amount is incorrect
plan the evidence we will collect by account and assertion: goal is to develop a ______
audit program
_______- sales where the customer agrees to purch the goods, but the seller retains physical possession until the customer requests shipments
bill and hold sales (aka parked inv scheme)
_____ - issuance of sales invoice to customers for goods shipped
billing
seg of duties: o Credit function separate from ______ o AR separate from ________ o Shipping separate from _______ o Cash receipts separate from _____
billing, general ledger, billing, ar
how to audit a FS cycle: auditors focus their tome on ______, related _____, and the resulting ______
business trans, controls, trans
________ - processing of the receipt of cash from customers
cash receipts
______ - marketing practices that suppliers sometimes use to boost sales by inducting distributors to buy more inventory than they can promptly resell
channel stuffing (aka trade loading)
how can you test the following controls: Timely matching of sales invoices and shipping documents or other documents.
compare documents to journal
_______ factor: May be disputed between auditor and management over when revenue / expenses / related profits should be recognized
complex of rev recog process
Set and document the control risk for the revenue process: set achieved level of ______, if results of test dont support planned level then set control risk at lower / higher level
control risk, higher
______ - when customer purch product on credit from the entity for the 1st time
credit approval form
______- approp approval of customer orders for credit worthiness
credit authorization
______ - details of the type and quan of products or services ordered by the customer
customer sales order
________ - contains the details of all sales, cash receipt, credit memo trans processed through customer account
customer statement
______ factor: Difficult to audit can pose inherent risk problems. Risk of MM for these estimates is a function of factors such as complex and reliability
diff of audit trans and AB
how can you test the following controls: Authorization for credit sales. Authorization for shipping. Authorization for prices and terms of sale
examine documents for approval
collect and eval evidence: once we have evidence, compare _____ to _____
findings to tolerable mis
______ - proper classification of revenue / collections / rec in the FS accounts
general ledger
5 step approach of rev recognition
identify contracts / performance obligations, determine trans price, allocate trans price to performance obligation, rec revenue when entity satisfied obligations
collect and eval evidence: might need to ____ testing, get more / less evidence from client
increase, more
_____ factors: Probability, level of competition, rate of tech change
industry related
4 specific IR factors that may affect the rev process
industry related, complex of rev rec, difficulty of audit trans, misstatement detected in prior audits
rev transactions: Considering the assertions and the possible misstatements that can occur if _______ does not operate effectively
internal controls
how can you test the following controls: Use of and accounting for pre-numbered documents
look for sequences of documents that omitt / duplicate numbers
______ factor: Presence of misstatements in previous audits is good indicator that misstatements are likely to be present during the current audit
misstatement detected in prior audits
assess risk: 1st identify _____ and link them to _____
misstatement risk, assertions
_______ confirmation requests are used when there are a large number of accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmation.
negative
how can you test the following controls: Mailing of monthly statements & independent channel for handling customer's billing complaints
observation and examine files
which 2 assertions to focus on when auditing sales
occurrence and cutoff
______ - processing has not been completed bc of items out of order or backorder
open order report
______ - acceptance of customer orders for goods into the system in accordance w/ management criteria
order entry
7 functions in the rev process
order entry, credit authorization, shipping, billing, cash receipts, ar, GL
______ confirmations are generally used when an account contains large individual balances or if errors are anticipated because control risk is assessed to be high
positive
understand nature: goal is to identify _____ and _____
potential mis and key controls
preliminary AP for revenue allows us to link _____ to ______ that we will focus more on during audit
potential miss to assertions
______ - transaction that are not considered arm's length
related party trans
3 major steps in setting CR for the rev process: understand and document rev process based on _______, plan and perform _____, set and document _____
reliance strategy, test of controls, control risk
2 types of strategies to choose from
relying on controls or using substantive
Plan and perform test of controls on revenue transactions: examine _____ to identify relevant controls that help to prevent / detect /correct MM
rev process
An entity recognizes _______ to depict the transfer of promised goods to customers in an amount that reflects the ______ to which the entity expects to be entitled in exchange for goods / services
revenue, consideration
3 types of transactions are typically processed through the revenue process
sale of goods, receipt of cash, return of goods
_______- used to bill the customer
sales invoice
3 misstatements that affect the occurrence of sales
sales recorded before shipment, duplicate sales, fake sales
the goal of revenue is to _____
sell things
understand nature: 4 most common key controls
sep of duties, info process control, physical control, performance review (SIPP)
_______ - ship goods that have been authorized
shipping
which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? billing department supervisor matches _____ w/ ______
shipping doc with entries
_______ - be prepared anytime goods are shipped to customer. Serve as a bill of landing
shipping document
Revenue recognition process occurs over a short / long period of time
short
4 fraud risks related to rev recognittion
side aggrement, channel stuffing, related party trans, bill and hold sales
______ - arrangements that are used to alter the terms of recorded sales in order to entice customers to accept delivery of goods
side aggrements
t/f: Auditors have the responsibility to provide reasonable assurance that the financial statements contain no material misstatements due to fraud.
t
plan the evidence we will collect by account and assertion: after know how much evidence, we then pan tests..such as____(4). do this using ______
test of controls / sub test of trans / sub ap / detalied test of balances, MIRADCOPS
collect and eval evidence: look at _____ and _____ to reassess CR
test of controls and sub test of trans
· Key segregation of duties Important in revenue process bc the potential for ____and___
theft and fraud
4 steps to audit FS cycle
understand nature, assess risk, plan the evidence that will collect, collect and eval evidence
auditors focus on these when auditing FS cycle bc it helps with "_________"
what could go wrong and is there any IC in place to stop it
- For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not approve ______ of customers' accounts
write offs