ACC 450 Chapter 11

How are non-replies handled for negative confirmations?

Auditors assume information on confirmation is correct

What is the audit procedure to ensure inventories are reduced, when appropriate, to replacement cost or net realizable value?

Valuation or allocation; Examine current vendor's price lists

What substantive procedure would help establish the accuracy of sales transactions?

Vouch sales recorded in November 20x8

The revenue cycle includes:

Receiving orders from customers, delivery and billing of goods/services, and the recording and collection of A/R

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

Shipping documents file

Positive confirmation request

A request that the confirming party respond directly to the auditor providing the requested information or indicating whether the confirming party agrees or disagrees with the information in the request

Negative confirmation request

A request that the confirming party respond directly to the auditors only if the confirming party disagrees with the information in the request

There is a presumption that auditors will 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

When vouching debit entries in accounts receivable subsidiary ledger back to supporting sales invoices, what is being tested?

Debit entries in the accounts receivable sub ledger are properly supported by sales invoices; Existence

What 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

The auditor suspects that the entity's controller has overstated sales and accounts receivable by recording fictitious sales to regular customers in the entity's books. What auditing procedure should be taken?

Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer

The auditor suspects that vouchers were prepared and processed by an accounting department employee for merchandise that was neither ordered nor received by the entity. What auditing procedure should be taken?

Examine the supporting purchase orders and receiving reports for selected paid vouchers

The most time-consuming and critical audit procedures for receivables and revenue are those designed to test the assertions of:

Existence, occurrence, and valuation

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

Inflated sales for the year

An auditor suspects that the controller wrote several checks and recorded the cash disbursements just before year-end but did not mail the checks until after the first week of the subsequent year. What auditing procedure should be taken?

Obtain the cutoff bank statement and compare the cleared checks to the year-end bank reconciliation

What type of addresses are a red flag for audits?

P.O. Boxes

How can a firm control disbursements so that if a duplicate invoice is sent by the supplier, the payment will not be made a second time?

PAID stamp on original invoice that was paid on in case duplicates are sent

The auditor suspects that the entity is inappropriately increasing the cash reported on its balance sheet by drawing a check on one account and not recording it as an outstanding check on that account and simultaneously recording it as a deposit in a second account. What auditing procedure should be taken?

Prepare a bank transfer schedule

Evaluate F/S presentation and disclosure

Presentation and Disclosure

What is the audit procedure to ensure the major categories of inventories and their basis of valuation are adequately reported in the F/S?

Presentation and disclosure; Review drafts of the financial statements

A/R has a joint relationship with:

Revenue

The results of a study by Church and Shefchik (2012) indicates that the financial accounts most often impacted by audit deficiences include:

Revenues, A/R, Allowance for Bad Debts

What substantive procedure would help determine that the presentation and disclosure of receivables is adequate?

Review drafts of financial statements

What substantive procedure would help determine that the valuation of receivables is at appropriate net realizable values?

Review the aged trial balance for significant past due accounts

What is the audit procedure to ensure the entity has legal title to inventories?

Rights and obligations; Select a sample of recorded items and examine supporting vendors' invoices and contracts

Lapping

The concealment of a cash shortage by delaying the recording of cash receipts

For many companies, the primary source of revenue is from:

The sale of goods or services to customers on credit

How would you test credit sales for understatements?

Trace from supporting documents to recorded entries in sales journals

What audit procedure would test whether actual purchases are recorded?

Tracing from supporting documents to purchase journal

How are non-replies handled for positive confirmations?

Try second request, then perform alternate procedures such as checking subsequent cash receipts

Notes receivable

Written promises to pay certain amounts at future dates

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

Accounts receivable subsidiary ledger

Window dressing

Actions taken around the balance sheet date to improve the financial picture presented in the F/S

The auditor suspects that a lapping scheme exists because an accounting department employee who has access to cash receipts also maintains the accounts receivable ledger and refuses to take any vacation or sick days. What auditing procedure should be taken?

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips

The entity's cash receipts of the first few days of the subsequent year were properly deposited in its general operating account after the year-end. However, the auditor suspects that the entity recorded the cash receipts in its books during the last week of the year under audit. What auditing procedure should be taken?

Compare the details of the cash receipts journal entries with the details of the corresponding daily deposit slips

The auditor is examining the entity's bank reconciliation and needs to corroborate the cash balance per the entity's books. What auditing procedure should be taken?

Compare to the year-end general ledger

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

Completeness

What is the audit procedure to ensure recorded inventory quantities include all products at hand?

Completeness; Select a sample of items during the physical inventory count and determine that they have been included on count sheets

The entity borrowed funds from a financial institution. Although the transaction was properly recorded, the auditor suspects the loan created a lien on the entity's real estate that is not disclosed in the financial statements. What auditing procedure should be taken?

Confirm the terms of borrowing arrangements with the lender

According to the Association of Certified Fraud Examiners, one of the most common methods for committing F/S fraud is:

Early revenue recognition

What confirmation is rarely used and not ideal for auditing purposes?

Negative confirmation

Should there be a purchase order for each purchase requisition?

Not necessarily - sometimes purchase requests aren't approved, etc.

Substantive test: Inspect notes on hand and confirm those not on hand

Objective: Existence/Rights

Substantive test: Perform analytical procedures

Objective: Existence/Rights/Completeness

Substantive test: Review year-end cutoff of sales transactions

Objective: Existence/Rights/Completeness

Substantive test: Verify interest earned on notes receivable

Objective: Existence/Rights/Completeness

Substantive test: Confirm receivables with debtors

Objective: Existence/Rights/Valuation

Substantive test: Evaluate the business purpose of significant and unusual transactions

Objective: Existence/Rights/Valuation/Presentation and Disclosure

Substantive test: Investigate the existence of pledges receivables and receivables from related parties. Evaluate financial statement presentation and disclosure

Objective: Presentation and Disclosure

Substantive test: Evaluate accounting estimates for revenue. Determine adequacy of allowance for uncollectible accounts

Objective: Valuation

What are auditors especially concerned with when auditing A/R?

Related party receivables

Bill and hold transactions

Sales are billed but goods are not shipped

Channel stuffing

Sales are boosted by inducing customers to buy substantially more inventory than they can promptly resell

The details of invoices for equipment repairs were not clearly identified or explained to the accounting department employees. The auditor suspects that the bookkeeper incorrectly recorded the repairs as fixed assets. What auditing procedure should be taken?

Scan the debits to the fixed asset accounts and vouch selected amounts to vendor's invoices and management's authorization

The auditor discovered an unusually large receivable from one of the entity's new customers. The auditor suspects that the receivable may be fictitious because the auditor has never heard of the customer and because the auditor's initial attempt to confirm the receivable has been ignored by the customer. What auditing procedures should be taken?

Send a second request for confirmation of the receivable to the customer and make inquiries of a reputable credit agency concerning the customer's creditworthiness; Examine the entity's shipping documents to verify that the merchandise that produced the receivable was actually sent to the customer

Cooper, CPA, is auditing the F/S 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

What is the audit procedure to ensure cost of inventories is properly calculated?

Valuation or allocation; Select a sample of recorded items and examine supporting vendors' invoices and contracts

How would you test credit sales for overstatements?

Vouch from sales journal to supporting documents

What substantive procedure would help establish the completeness of receivables transactions?

Vouch sales recorded in January of 20x9

What substantive procedure would help verify the cutoff of sales transactions?

Vouch sales recorded in January of 20x9

What substantive procedure would help establish that the client has rights to the recorded receivables?

Vouch sales recorded in November 20x8

What audit test could be used to determine whether recorded purchases represent valid business expenses?

Vouching from purchase journal to supporting documents

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 departments, recommendations, and supporting evidence

Substantive test: Obtain aged listing of receivables and reconcile to ledgers. Obtain analyses of notes receivable and related interest

Objective: Valuation

Which documents need to be present before payment is approved?

Purchase order, receiving report, vendor's invoice