Chapter 11

3 exceptions to should

-A/R- immaterial -ineffective -low risk & defective risk high (don't need much evidence)

Test of Controls

-Examine Significant Aspects of a Sample of Sales Transaction -Compare details of a sample of Shipping Docs to related Sales Invoices -Review the use and Authorization of Credit Memoranda -Reconcile selected Cash Register Tapes and Sales Tickets with Sales Journals -Test IT App Controls -Exam Evidence of Review and Approval of Revenue Est

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

Assess the allowance for uncollectible accounts for reasonableness.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Shipping documents file.

aged trial balance

a listing of the balances in the accounts receivable master file at the balance sheet date broken down according to the amount of time passed between the date of sale and the balance sheet date

External Confirmation

obtaining a written response about a particular item from a third party

Related parties MUST be____ Are _____illegal

disclosed not

Related parties include

1. Spouse 2. Parents, Grandparents, etc. 3. Children 4. Brothers/Sisters 5. Trusts/Beneficiaries 6. >50% corporation or partnerships 7. Constructive ownership

Confirmation request

A request sent to a confirming party requesting that the confirming party consider the accuracy of information included in that request. A confirmation request may take one of two forms: positive confirmation request and negative confirmation request.

positive confirmation

A request to customers asking them to respond directly to the auditor if they agree or disagree with the indicated balance.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low:

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

To test the existence assertion for recorded receivables, the auditors would select a sample from the:

Accounts receivable subsidiary ledger.

Which assertion is NOT an assertion about account balances

Accuracy

Most difficult assertion to test Anytime you see the word TRACED

Completeness

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

Completeness

Auditors may ignore individually immaterial accounts when confirming accounts receivable.

Correct

Confirmations address existence more than they address completeness.

Correct

Second requests are ordinarily sent for positive form confirmation requests when the first request is not returned.

Correct

The auditors ordinarily should confirm accounts receivable.

Correct

The confirmation requests should be mailed to respondents by the CPAs.

Correct

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Delivery has occurred or is scheduled to occur in the near future.

Anytime you see the word Vouch Biggest assertion

Existence

The auditor confirmation requests for significant accounts receivable balance

Existence

Which assertions is NOT an assertion about classes of transaction and events

Existence

A combination of positive and negative request forms must be used if receivables are significant.

Incorrect

Accounts receivable are ordinarily confirmed on a standard form developed by the American Institute of Certified Public Accountants and the Financial Executives Institute.

Incorrect

Auditors should always confirm the total balances of accounts rather than individual portions (e.g., if the balance is made up of three sales, all three should be confirmed).

Incorrect

Confirmation of accounts receivable is a generally accepted auditing standard.

Incorrect

The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's tolerable misstatements amounts.

Incorrect

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

Should

Mandatory

Management asserts that all revenue transaction recorded during the period were valid

Occurrence

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?

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

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Recording sales when the customer is likely to return the goods

Verify the clients ownership of the assets- by examining titles to the fixes assets

Rights and Obligation

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

Send positive confirmation requests.

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

Theft of cash register sales

Test the adequacy of allowance for doubtful account

Valuation or allocation

identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable:

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence

Risk evidence is low

use the weaker form

pledging receivables

using accounts receivable as collateral for a loan

Payment is a

valid confirmation

Allowance for doubtful accounts primary assertion of testing is

valuation

When should a company record revenue

when they perform

Oral responses do not meet the definition of an external confirmation, must have

written response