Accounting 492 Exam 2

A malicious program attaches itself to the payroll program and inappropriately modifies it to issue 300 checks for each employee overriding item count and limit controls

Antivirus software

In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: a. What type of sampling plan should the auditors use for this test?

Attributes sampling

Who sends AR & AP requests?

Auditor sends third parties, such as banks or suppliers, asking them to confirm certain financial information.

Merits attention, less than a material weakness

Significant deficiency

Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 2. How should the auditors mitigate the risk associated with both very large and very small balances?

Stratification would mitigate the risks associated with a diverse population.

GAAP

Suitable criteria

A senior systems programmer left the company and since that time causes of breakdowns in the system have become difficult to address as no one seems to be able to understand the programs that programmer worked on and developed.

Systems documentation

Inquire, inspect, observe, reperform

Tests of controls

In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: b. Using the appropriate table or formula from this chapter, compute the required sample size for the test.

The appropriate table for determining sample size is illustrated in Figure 9-4. Using the row for a 2 percent expected deviation rate and the column for a tolerable deviation rate of 8 percent, we find a required sample size of 77 items, with 2 allowable deviations

Follow a transaction through the system

Walk through

Property tax payments are typically ______ in number.

few

Management may have fraudulently overstated revenue by making __________ journal entries.

inappropriate

Sometimes auditors may ____ securities on hand.

inspect

Analyzing bank transfers at the end of the period being audited and the beginning of the next period helps detect ____________.

kiting

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

Income taxes withheld from employees but not yet submitted to the government are considered to be a(n) _______.

liability

When testing customer deposits, auditors typically review a(n) ______of the individual deposits.

list

When auditors find unrecorded liabilities, before adjusting they must consider_______.

materiality

After testing internal controls related to investments, it may be necessary to _______ the risk of material misstatement.

modify

When the auditors estimate sampling risk using professional judgement rather than by using the laws of probability, they are said to be using __________ sampling

nonstatistical

Auditors are often concerned with the ______ of cash as this is where most misstatements occur

overstatement

AR confirmations can be sent electronically or via ________.

paper form

The auditors select an audit sample from the __________ representation of the population

physical

To gain overall assurance as to the reasonableness of accounts payable, the auditor may consider _________.

ratios

Cash analyses need to be _______ to the general ledger.

reconciled

Federal and state governments do not specify the exact ______ to be maintained, but do specify the amounts to be withheld.

records

Cash reconciliations can be tested via __________.

reperformance

One way to avoid misstatement of revenue is to ensure the client has proper ________.

cutoff policies

After auditing cash, it is important to evaluate proper financial statement presentation and __________ of cash.

disclosure

_________ sampling is usually used in situations in which the auditors expect a very low rate of occurrence of some critical deviation

discovery

Audit efficiency: Control risk too high

-controls were not designed and operating effectively, so they won't rely on the internal controls. As a result, the audit team would have to lower detection risk and perform more substantive testing procedures. -can result in the auditor's conducting more audit work than necessary in order to reach the correct conclusion

A confidence level of _______ in a control is equivalent to a statement that the risk of assessing control risk too low is .10

.90 (or 90%)

Place the general sequence of steps of the audit process (shown below) in the correct order for an audit of cash. Use the understanding of the client and its environment to consider inherent risks related to cash. Obtain an understanding of internal control over cash. Assess the risks of material misstatement and design further audit procedures (tests of controls). Perform further audit procedures--tests of controls. Perform further audit procedures--substantive procedures for cash transactions and balances

1. Use the understanding of the client and its environment to consider inherent risks related to cash. 2. Obtain an understanding of internal control over cash. 3. Assess the risks of material misstatement and design further audit procedures (tests of controls). 4. Perform further audit procedures--tests of controls. 5. Perform further audit procedures--substantive procedures for cash transactions and balances

Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount of expense incurred on debt but not charged yet by bank

Accrued Interest

Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount estimated to be incurred for utilities unbilled period

Accrued Utilities

Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest Amount estimated to be anticipated for warranty claim of sales already recorded

Accrued Warranty

BACKGROUND: Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 4. What procedures can be performed on customers who do not respond?

Auditors can perform alternate procedures like examining subsequent collections of cash receipts.

A file is damaged by exposure to excessive heat and reconstruction has proven very difficult

Backup support of files

A system in which like transactions are processed periodically as a group

Batch processing

Describe the reason that the auditors are concerned with the completeness of accounts payable

Because the company's financial strength is exaggerated by an understatement of liabilities.

An assistant auditor received the following instructions from her supervisor: "Here is a cutoff bank statement covering the first seven business days of January. Compare the paid checks returned with the statement and dated December 31 or earlier with the list of checks outstanding at December 31." What type of fraud might this audit procedure bring to light? Explain.

Cash shortages are sometimes concealed by intentionally omitting an outstanding check from the year-end bank reconciliation or by understating the amount of one or more outstanding checks. These omitted or understated checks will, however, probably be paid by the bank early in January and returned with the cutoff bank statement. The audit procedure of comparing the paid checks returned with the cutoff bank statement and dated December 31 or earlier with the list of outstanding checks at December 31 would disclose any omissions or understatements in that list.

________ needs to be assured in order to recognize revenue.

Collectibility

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded

Completeness of assets

Describe three ways in which the auditors establish the completeness of accounts payable.

Confirmation of accounts payable. Reconciliation of liabilities with vendor statements. Comparison of cash payments subsequent to the balance sheet date with the accounts payable trial balance. Investigation of unmatched invoices and unbilled receiving reports. Investigation of invoices received subsequent to the balance sheet date.

Likelihood a misstatement will not be prevented or detected

Control risk

Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest An amount paid by a customer for a container to be later returned to the company

Customer Deposit

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Vouch sales and cash receipt transactions occurring near period end

Cutoff of transactions

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Analyze bank transfers occurring at year-end

Cutoff, existence, occurrence, rights, and completeness

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Verify the client's cutoff of cash transactions

Cutoff, existence, occurrence, rights, and completeness

A subject-oriented, integrated collection of data used to support management decision-making processes

Data warehouse

A system that eliminates data redundancy and enforces data integrity by storing data separately from (outside) programs and that contains data for two or more IT applications.

Database system

Computer systems in different locations

Decentralized processing system

__________ communication with debtors is the most conclusive step in verifying accounts receivable

Direct

An environment in which a user department is responsible for developing, or purchasing and running, and IT system (application) with minimal or no support from the central information systems department

End user computing

Label each potential misstatement as either an error or fraud. 4. Recording sales in the wrong period based on the incorrect shipping information.

Error

Label each potential misstatement as either an error or fraud. 5. Revenue earned from franchise is incorrectly calculated

Error

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Obtain analyses of cash balances and reconcile them to the general ledger

Existence and accuracy

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Confirm a sample of receivables by direct communication with the debtors

Existence of assets

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Confirm cash balances with financial institutions

Existence, occurrence, accuracy, cutoff, and rights

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Count cash on hand

Existence, occurrence, accuracy, cutoff, and rights

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Provide a list of related parties to all members of the audit team to assist in identification of the transactions

Financial statement presentation and disclosure of

Unauthorized data is sent and accepted into system from a location external to the firm

Firewall

Label each potential misstatement as either an error or fraud. 1. Intentional overshipment of goods

Fraud

Label each potential misstatement as either an error or fraud. 2. Recording a sale for goods that the customer is anticipated to return

Fraud

Label each potential misstatement as either an error or fraud. 3. Recording a fictitious sale without receiving a customer order for the goods

Fraud

Label each potential misstatement as either an error or fraud. 6. Holding sales journal open to record next year's sales in the current year

Fraud

Substantive procedures and tests of controls

Further audit procedures

Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 1/20 for cleaning services for the month of December; not included in AP as of 12/31

Improperly excluded from AP

Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice received 12/30 for January temporary workers; included in AP as of 12/31

Improperly included in AP

Likelihood of misstatement assuming no controls

Inherent risk

Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure reports tie to client activity

Inspect monthly brokerage reports on securities owned, purchased, and sold

Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Verify that internal auditors' observations are consistent with those of external auditors

Inspect reports by internal auditors on their review of securities and derivates

Reporting on internal control and financial statements

Integrated audit

Unnoticed loss of a transaction during processing of data

Item counts

BACKGROUND: Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 3. Because so many customer balances consist of multiple invoices, what could the auditors do to eliminate unnecessary reconciliation?

Jenner & Jenner CPAs could base their sampling, and hence their confirmations, on confirming invoices, not balances. More confirmations will be sent, but they will be easier to follow up on and reconcile.

Processing a transaction that is unreasonable in amount

Limit test

Creates a reasonable possibility a material misstatement will not be detected

Material weakness

Customers provide incomplete data (omitting a field or more) in ordering goods over the Internet.

Missing data test

In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a deviation rate of 2 percent. Use Figure 9-4 and Figure 9-5. Required: c. Assume that the sample indicates four deviations. May the CPAs conclude with a 5 percent risk of assessing control risk too low that the population deviation rate does not exceed the tolerable rate of 8 percent?

No. Since 4 deviations is in excess of the allowable deviations (2) in Figure 9-4, the CPAs know that the upper limit is in excess of 8 percent. Figure 9-5 may be used to determine that when the sample contains 4 deviations the upper limit is 11.8 percent (using the table values for a sample of 75 items).

Access to and alteration of data by an unauthorized system user

Passwords

Several laptops and other devices are stolen

Physical controls over computer equipment

Match each substantive procedure relative to cash listed with its corresponding audit objective or assertion. 1) Existence and accuracy 2) Existence, occurrence, accuracy, cutoff, and rights 3) Cutoff, existence, occurrence, rights, and completeness 4)Presentation and disclosure Investigate payments to related parties

Presentation and disclosure

Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 1/5 for January security protection; not included in AP as of 12/31

Properly excluded from AP

Determine the proper accounts payable (AP) classification at year-end for each scenario listed below. a) Properly included in AP b) Improperly excluded from AP c) Properly excluded from AP d) Improperly included in AP Invoice dated 12/20 for maintenance services and unpaid as of year-end; listed in AP at 12/31

Properly included in AP

Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure policies written are being followed

Review and test reports of investment activity for the investment committee

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Review confirmations of liabilities to determine if receivables have been sold

Rights to assets

Inquiries, analytical procedures, observation

Risk assessment procedures

Read the example of each type of liability and, using the hint provided, match it to the type of liability it is. Sales Tax Payable Customer Deposit Accrued Utilities Accrued Warranty Accrued Interest The amount collected from the customer for a retail sale imposed by the state government

Sales Tax Payable

An error occurs when an invalid account number (one digit is incorrect) is keyed in and accepted by the system

Self checking numbers

Match the listed internal controls procedures with their objectives. 1) Trace several transactions for purchases and sales of investments through the accounting system 2) Review and test reports of investment activity for the investment committee 3) Inspect reports by internal auditors on their review of securities and derivates 4) Inspect monthly brokerage reports on securities owned, purchased, and sold Ensure transactions are recorded and classified properly

Trace several transactions for purchases and sales of investments through the accounting system

Match each example audit procedure with its correct general audit objective related to accounts receivable. 1. Existence of assets 2. Rights to assets 3. Completeness of assets 4. Cutoff of transactions 5. Valuation of assets 6. Financial statement presentation and disclosure of Compare the amount of credits given to customers in the subsequent period to the amount estimated by management

Valuation of assets

Audit standards indicate that there is a presumption that auditors will confirm accounts receivable unless the balance is immaterial, confirmations are deemed ineffective, or the auditors' assessment of risk is low and other procedures will achieve the same objective. However, these instances are considered few and far between and current trends in auditing indicate that there is an expectation that accounts receivable will be confirmed. Auditors may stratify the population, use haphazard or judgmental sampling, and send positive or negative requests. Jenner & Jenner CPAs are the auditors for the Leno Company. In reviewing the accounts receivable aging, the auditors learn that there is a high number of accounts with balances, there are some very large and very small balances, and many customers' balances consist of multiple invoices. 1. Should Jenner & Jenner CPAs send accounts receivable confirmations?

Yes, audit standards (AU 330) presume that auditors will send accounts receivable confirmations.

Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.

accomplished

Cutoff bank statements include activity for the period _________ the period being audited

after

When searching for unrecorded liabilities, the auditors consider transactions recorded ______ year-end

after

Side _________ can substantially alter the terms of a sale.

agreements

Receivables that have been sold should not remain as a(n) _____ on the company's books.

asset

Cash confirmations need to be mailed under the control of the __________.

auditor

Confirmations do not necessarily mitigate the risk of _________.

bad debt

An important step in testing investments is to ensure all persons with access to investments are properly __________.

bonded

When testing other accrued liabilities, auditors may independently calculate the amount and ______ it to management's estimate.

compare

Accounts payable ________ can be mailed to vendors from whom substantial purchases have been made

confirmations

In performing tests of controls, the auditors are primarily concerned with the risk of assessing ______.

control risk too low

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.

correctly

Overstatement may occur when sales for the next period are recorded in the _______ period.

current

It is important to verify _____ of both cash receipts and cash disbursements

cutoff

Many instances of misstatement are based on the inappropriate recognition of ________.

revenue

A sample internal control questionnaire question may ask about _________ inherent in the investment policy.

risk

Inherent in the use of sampling is ________ risk which is the possibility of selecting a sample that is not representative of the population.

sampling

When using ________ an item from the population may be selected two or more times for inclusion in the sample

sampling with replacement

Auditors need to consider _____ terms for determining ownership and whether a liability should be recorded.

shipping

The term _________ refers to the process of dividing a population into relatively homogeneous subgroups

stratification

Variables sampling plans are typically used for _________ procedures.

substantive

An investment committee is a standing committee of ________.

the board of directors

To use attributes sampling tables, the auditors must stipulate the desired risk of assessing control risk too low, the expected deviation rate in the population, and the desired __________.

tolerable deviation rate

Audit Efficiency: Control risk too low

under-testing substantive procedures, and over-reliance on internal controls and can result in the auditor failing to detect a material misstatement in the financial statements.

It is necessary to _____ the client's cutoff of cash transactions

verify