ACCT 473 Final
What control can be used to test completeness for credit sales?
The control matches daily shipping documents in a one-for-one match with sales invoices to ensure that each shipment results in a sales invoice. With credit sales transactions, segregation of duties in performing these subfunctions is an important internal control.
what are the three types of misstatements?
factual, judgmental, projected
Assume an auditor is auditing a small city or county with poor segregation of duties in the purchasing process. What are the most significant risks in this case? What are the implications for developing an audit strategy in the purchasing process?
tThe most significant risk involves phantom vendors where an employee creates a fictitious vendor to pay themselves. In these cases, the auditor with appropriate professional skepticism should consider fraud risk to be high, the risk of material misstatement to be high, and design effective and extensive substantive tests to provide reasonable assurance of detecting material fraud.
Auditing standards require that analytical procedures be used once again near _________ to assist the auditor in forming an overall conclusion about whether the financial statements are consistent with the auditor's understanding of the entity
the end of an audit
Critical accounting estimates are
Critical accounting estimates are accounting estimates that possess the following two characteristics (AS 1301.A3). The nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. The impact of the estimate on financial condition or operating performance is material
Audits of each company in each year must be _____________
Custom made!!
What are the unique communication requirements for public cos?
For a public company audit, significant findings should be communicated with the audit committee of the board of directors. In addition, the PCAOB standard specifies that critical accounting policies and practices and critical accounting estimates must be communicated to the audit committee.
What is a control to test the completeness of cash receipts
The software compares each item in the bank remittance report (or the prelist of cash receipts if cash and checks are received by the client) to develop a one-for-one match with recorded cash receipts in the daily remittance report. The strength of these controls depends on adequate segregation of duties and controls establishing immediate recorded accountability for all cash receipts to prevent the diversion or skimming of cash receipts.
What is an example of a control to test completeness of cash disbursements?
The software compares the daily total in the cash disbursements journal with the total of vouchers submitted for payment.
What is an example of an ERS control to test completeness of purchases
The software generates a daily report of receiving reports that have not been matched one for one with the recording of a purchase and a liability.
What are the three major revenue transaction classes? What are the two classes with the highest volume of transactions?
The three classes are credit sales, cash receipts, and sales adjustments. (1) credit sales and (2) cash receipts have the highest volume.
What is a legal letter, when is it sent, and what is it used for?
Toward the end of the audit, auditors perform an inquiry procedure specifically designed to gather information about loss contingencies arising from litigation, claims, and assessments. Auditors will communicate directly with the client's external legal counsel by sending a letter of inquiry, often referred to as a legal letter. Legal letters are sent to all attorneys the client paid for legal services. Attorneys and their clients have a privileged relationship. Therefore, before auditors can communicate with a client's legal counsel, client management must give permission to the attorneys to discuss the case with the auditors. The client grants permission to the attorneys by signing the legal letter. The objective of the legal letter is to gather evidence regarding: -The existence of uncertainties arising from litigation, claims, and assessments. -The time period in which the cause for the legal action occurred. -The probability of an unfavorable outcome for the client. -An estimate of the potential loss. The format and wording of the letter is dictated by auditing standards, so all auditors will follow the same basic format.
What type of event is the following and what adjustments should be made: The bankruptcy of a client's customer after year-end as a result of poor financial conditions that existed as of the balance sheet date.
Type I - If the customer has a large accounts receivable balance on the client's year-end balance sheet, then management needs to reconsider the adequacy of the allowance for doubtful accounts. The allowance balance and the related bad debt expense may need to be increased.
What type of event is the following and what adjustments should be made: The client receives payment from an insurance company after year-end in resolution of a claim that was still in negotiation at year-end.
Type I - Since the outcome of the negotiation was in favor of the client, management should establish a receivable at year-end
What are the two types of subsequent events and describe requirements
Type I subsequent event = event that provides evidence of conditions that existed at the date of the financial statements. A Type I event requires an adjustment to the financial statements. Type II subsequent event = event that provides evidence of conditions that arose after the date of the financial statements. A Type II event does not require an adjustment to the financial statements but may require disclosure in the notes to the financial statements.
What type of event is the following and what adjustments should be made: Shortly after year-end, management commits to purchasing another business.
Type II - Purchasing another business will probably add significant assets and debt to the balance sheet and may result in changing the capital structure of the client. This commitment is significant and should be mentioned in the notes.
What type of event is the following and what adjustments should be made: The loss of a building or inventory as a result of a fire or flood after year-end, and the client is underinsured.
Type II - The situation, and an estimate of the amount of loss not covered by insurance, should be disclosed in the notes.
How is confirmation of AR and AP different
Unlike the confirmation of accounts receivable, there is no presumption made about the confirmation of accounts payable. This procedure is optional because (1) confirmation larger payables offers no assurance that unrecorded payables will be discovered and (2) external evidence in the form of invoices and vendor monthly statements should be available to substantiate the balances. Often the auditor may look at disbursements after year-end to find unrecorded payables. Confirmation of accounts payable is recommended when the detection risk is low. Nevertheless, the auditor should confirm small and zero balances along with large balances if confirming accounts payable.
Typically, uncorrected immaterial misstatements from a prior period are expected to
"reverse" in the next period
What subprocesses are part of cash disbursements?
(1) approving cash disbursements and (2) recording cash disbursements.
What are the parts of the cash sales process?
(1) receiving cash, (2) depositing cash, and (3) recording the receipt
What is a control to test the completeness of payables?
(Tracing) The software starts with a population of daily receiving reports and develops a one-for-one match with vouchers to ensure each receiving report results in a voucher (the recording of a payable). A report is generated and reviewed daily, reporting any goods received that have not resulted in a recorded voucher.
Pervasive factors that might motivate management to misstate purchasing process assertions include:
- pressure to understate expenses in order to report achieving announced profitability targets or industry norms that were not achieved in reality and -pressure to understate payables in order to report a higher level of working capital when the entity is experiencing liquidity problems or going-concern doubt
What are the three common devices that have been used to overstate revenues in the past? Describe them. What are the assertions that are of most concern in relation to these three devices?
-Consignment sales = may occur in a transaction between a manufacturer and a wholesaler, when the seller retains title to inventory in the wholesaler's possession, and the sale is completed when the wholesaler sells the inventory forward; a consignment sale may be created in economic substance when the terms of sale create uncertainties about whether the wholesaler assumes risk of ownership upon receipt of goods. Revenue should be deferred -Refund rights = when a sale is made with the right to return the goods for a full refund, even if the goods are not defective. When rights of return exist or are likely to be accepted, a reasonable estimate of refunds should be made when revenue is recognized. In determining the amount of the estimated refunds, management should consider competition, obsolescence, and the length of time over which the product can be returned. -Bill-and-hold transactions = Sunbeam corporation was the first to use this to inflate revenues. Bill-and-hold is when a company bills a customer for goods but does not ship them. ASC 606 has very narrow criteria for when revenue can be recognized for a bill-and-hold transaction; the transaction must be initiated by the customer, and the customer must have a sound economic reason for purchasing the goods and asking the seller to continue to hold the goods. Recognizing revenues without shipping goods will cause gross margins to improve and accounts receivable turnover in days to slow -These three devices usually result in problems associated with the occurrence of revenues and the existence of receivables.
What are other risk factors that contribute to misstatements in the revenue process?
-Gross sales (only commission earned should be recorded as revenue). -The volume of sales, cash receipts, and sales adjustment transactions is often high, resulting in numerous opportunities for errors to occur. -The timing and amount of revenue to be recognized (occurrence and cutoff of revenues) may be contentious owing to factors such as complex accounting standards, the need to make estimates, the complexity of the calculations involved, and purchasers' rights of return. -When receivables are factored with recourse, the classification of the transaction as a sale may be incorrect. Receivables may be misclassified as current or noncurrent owing to difficulties in estimating the likelihood of collection within the next year or events upon which collection is contingent. -Cash receipt transactions generate liquid assets that are particularly susceptible to misappropriation (completeness of revenues or cash receipts). -Sales adjustment transactions may be used to conceal thefts of cash received from customers by overstating discounts, recording fictitious sales returns (occurrence or accuracy of discounts or sales returns), or writing off customers' balances as uncollectible (occurrence of write-off of accounts receivable).
What assertion does a three way match test? What is a three way match
A "three-way match" means matching a sales invoice with underlying shipping documents and the customer's sales order. Where title passes when goods are shipped, revenue is appropriately recognized when all three sets of documents match. A three way match tests the occurrence assertion
What is lapping? How can an auditor be alerted to a lapping scheme?
A fraud scheme where an accounting clerk incorrectly classifies cash receipts from one customer as being received from another in order to cover up the diversion of funds from a customer for personal gain. The accounts receivable clerk must continue to cover the shortages from Customer B with funds from another customer, and so on. Sometimes the fraudster can solve the problem of keeping a lapping scheme going by falsifying a sales adjustment to reduce the receivable or by writing off part of a customer's balance through a journal entry. The auditor should be alert to the possibility of fraud when a cash receipt is credited to the wrong customer or when there is little or no justification for a sales adjustment or receivable write-off.
Auditing standards require auditors to report fraud to _________________________
A level of management at least one level above the level where the fraud occurred.
What is the biggest difference between AP and accrued expenses
AP have an invoice, but accrued expenses are estimated. So when we are testing AP, the numbers are usually exact.
Critical accounting policies and practices
Accounting policies and practices that are most important to the portrayal of the company's financial condition and results, and require management's most difficult, subjective, or complex judgments
Professional standards state there is a presumption that the auditor will request the confirmation of receivables during an audit unless:
Accounts receivable are immaterial to the financial statements. The use of confirmations would be ineffective as an audit procedure. The auditor's assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk.
When sending confirmations of AP, which accounts should be selected and why?
Accounts with zero or small balances should be among those selected for confirmation because they may be more understated than accounts with large balances.
Controls over approving customers' credit are associated with what assertions?
Accuracy, valuation and allocation assertion associated with the allowance for uncollectible accounts.
What are some qualitative characteristics of material misstatements?
Affects compliance with regulatory requirements. Has the effect of increasing management compensation. Relates to items involving particular parties, such as individuals related to management. Changes a loss to income or income to loss. Affects compliance with debt covenants or other contracts. Results from the occurrence of fraud. Relates to the incorrect application of an accounting policy that is likely to have a material effect on future periods. Affects whether the company meets a financial benchmark, such as analyst forecasts of earnings per share.
When is fraud risk evaluated?
After inherent risk is assessed and after controls are tested
Can you add/subtract to audit file after completion deadline?
After the audit file assembly completion deadline, nothing should be deleted or removed from the audit file. However, documentation can be added to the file after the assembly completion deadline.
What are some control activities useful in reducing the risk of misstatements and establishing the occurrence of such transactions?
All purchase returns should be authorized by the vendor. Goods should be returned only with a proper purchase return authorization, and an independent count of goods returned should be recorded on shipping documents such as packing slips and bills of lading. The software should match the debit memo information with the authorization for purchase return and the shipping documents and report any discrepancies. Adequate segregation of duties between obtaining authorization for purchase returns, shipping goods, and recording debit memos.
What controls should be in place surrounding sales adjustments? What assertion are these controls mainly regarding?
All sales returns should be authorized by sales management. Goods should be received only with a proper sales return authorization, and an independent count of goods returned should be recorded on a receiving report. The software should match the credit memo information with the sales order, authorization of sales return, and receiving report. Further, there should be adequate segregation of duties for authorizing sales returns, receiving goods, and recording credit memo. In larger public companies, a disclosure committee reviews these estimates if they could aggregate with other adjustments to an amount that is material to the financial statements. These controls serve to assure the occurrence of sales adjustment transactions.
The key accounting estimate involved in the revenue process is the _____? What are some audit procedures for this estimate.
Allowance for doubtful accounts.oUsing generalized audit software to foot and cross foot the aged trial balance of accounts receivable and agreeing the total to the general ledger balance. oTesting the accuracy of the client's aging by vouching to underlying sales invoices and shipping documents. oConsidering evidence concerning the collectibility of past-due amounts by, for example, inspecting correspondence from customers. oDevelop an auditor's estimate oBeware of anchoring and confirmation bias oCheck that re-aging of receivables isn't occurring (company is treating a partially paid receivable as a new one)oIdentifying customers with past-due balances and calculating credit histories for customers with past-due balances. oEvaluating prior estimates of uncollectible accounts with subsequent experience and the benefit of hindsight. oUsing the evidence obtained above to assess the reasonableness of the percentages used to compute the allowance component required for each aging category and the adequacy of the overall allowance.
What is an engagement quality control reviewer
An engagement quality control reviewer is typically a partner of the firm who is not part of the team that completed the audit. The reviewer must be independent of the client and have sufficient and appropriate experience to objectively evaluate the work completed on the audit.
When do auditors want lawyers to send the legal letter back?
As close to the end of fieldwork as possible
Describe a working paper review
As procedures are completed and documented in the working papers, the preparer will "sign off" with his or her initials and the date when he or she feels the work is ready for review. The work is reviewed by an audit team member with seniority over the team member who did the work. (Refer to Illustration 5.6 for the structure of an audit team.) The review process is an essential component of ensuring the audit team members maintain professional skepticism. Overconfidence bias, which is the tendency to overestimate one's own ability to make accurate assessments of risk or other judgments or decisions, may interfere with an auditor's professional skepticism. Having a robust review system in place helps to avoid overconfidence bias.
What are attorneys obligations regarding asserted and unasserted claims?
Asserted claims - attorneys will directly inform auditors of any omitted claims Unasserted claims - attorneys will NOT inform auditors of any omitted unasserted claims. this is an issue because GAAP requires probable unasserted claims to be disclosed. They will only inform mgmt of the omission
What are some audit procedures used to identify loss contingencies
Audit procedures used to identify loss contingencies include confirming with financial institutions, inspecting minutes of board of directors meetings, inspecting contracts and leases, inspecting tax returns, inquiry of management regarding completeness of recorded liabilities, examining related post-year end transactions, and inquiring of the client's legal counsel.
What do auditing standards require in regards to subsequent events?
Auditing standards require auditors to also conduct specific audit procedures to identify subsequent events that may occur up through the date of the auditor's report. These audit procedures include: Obtaining an understanding of how management identifies subsequent events. Inquiring of management and, if necessary, those charged with governance about whether subsequent events have occurred that may impact the financial statements. Reading the minutes of manager meetings and/or board of directors' meetings that have been held after the date of the financial statements. Reading the client's subsequent interim financial statements, if available, and other data, such as budgets and cash flow forecasts. Scanning manually, or through the use of audit data analytics, sales and receipts journals or other accounting records relating to transactions that have occurred after the date of the financial statements. Inquiring of the client's legal counsel regarding litigation, claims, and assessments.
What are auditor's responsibility regarding going concern
Auditors have a responsibility to gather evidence regarding: Management's process for evaluating the going concern status. The appropriateness of management's conclusions regarding it.
What are the parts of the purchasing process?
Authorizing purchases. Receiving goods. Recording purchases.
How are financial statements misstated if there is a material misstatement in the occurrence assertion regarding cash disbursements?
Cash is understated and expenses (or assets) are overstated. An internal control determines that the payable and the purchase order is cancelled so that it is not paid twice.
What controls should be in place for over the counter cash transactions?
Cash registers that can be used to verify agreement of cash on hand with the totals printed by the register or terminal. Proper physical controls over cash also require that all cash receipts be deposited daily.
What is an example of a key control to test completeness of cash disbursements?
Completeness of cash disbursements means that all disbursements (i.e. checks) have been recorded. The software compares the daily total in the cash disbursements journal with the total of vouchers submitted for payment.
What is the role of auditors in auditing loss contingencies
Determine if management's assessment is reasonable, appropriate liabilities have been recorded, and the disclosures are complete.
What is an EFT and what are its advantages over cash?
EFTs expedite the depositing of funds from customers, permit the company to receive credit for the receipts sooner, and provide external evidence of the existence of the transactions. They also eliminate the risk of theft of the receipts by company employees or the failure to record cash receipts.
Describe an EIPP system
Electronic invoice presentment and payment (EIPP) systems. EIPP systems use an independent third party to settle the business-to-business (B2B) transaction. An independent third-party payment processor, such as a bank or payment processor (e.g., Paypal or Venmo), is used to make the payment from the purchaser to the supplier. A third-party payment processor is often used because entities that store checking account number information must be Payment Card Industry (PCI) security compliant according to federal regulations, which requires investing in secure IT systems and paying for regular recertification. In an EIPP system, the purchasing entity: Receives an electronic invoice from the vendor. Validates the invoice (using a three-way match btwn invoice, purchase order, and receiving report). Cancels the vendor's invoice so it is not paid twice. Approves the invoice for payment (usually taking advantage of early payment discounts). Once the invoice is approved for payment, the third-party payment processor transfers funds from the purchasing entity to the vendor on the due date.
What is ERS and when is it most commonly used? Describe the flow of transactions of an ERS system
Evaluated receipt settlement (ERS) is a highly automated business process between suppliers and purchasers to exchange data electronically and execute a purchase transaction electronically. In larger public companies, ERS transactions represent 75-90% of all transactions. In smaller, privately owned companies, not-for-profit organizations, and governments, ERS transactions are rare. 1. Initiate an ERS transaction by signing a contract 2. Purchase company initiates a purchase order 3. Supplier acknowledged transaction by sending an ASN 4. Goods are shipped and received 5. Vendor invoice presented and 3 way match done 6. Payment conducted via EIPP
What are subsequent events?
Events occurring after the date of the financial statements (12/31) and before the date of the auditor's report
Describe loss contingencies and the acct guidance
FASB ASC Topic 450, Contingencies, provides accounting guidance for events, or potential events, that create uncertainty for a company. FASB defines a loss contingency as an existing condition or situation involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Some other examples of a loss contingency include income tax disputes with the IRS, guarantees of debt of others, threat of expropriation of assets, and pending or threatening litigation with employees, customers, vendors, or shareholders.
Give examples of how an auditor should consider industry-related factors of the availability and price volatility of raw materials.
For example, a computer assembler, which may depend on a single vendor for a unique component critical to an assembled product, may face significant price increases if key components are in demand or if supply chain issues exist. In contrast, a retail grocer deals with numerous vendors and prices. Here, intense market competition tends to stabilize prices, and substitute products are available. Thus, the grocer may be able to choose among a variety of providers, resulting in more limited exposure to inventory shortages or sudden price swings.
After evaluating inherent risk and control risk, the auditor is in a position to evaluate what?
Fraud risk
Professional standards require the auditor to presume that fraud risk is what for revenue recognition?
High
If auditors identify a material subsequent event, what next steps must be taken?
If auditors identify a material subsequent event, they must determine if the event has been properly reflected in the financial statements as required by the applicable financial reporting framework. It is management's responsibility to make an adjustment and/or disclosure as needed. If management does not take the proper action that is required for the financial statements to be fairly presented, auditors may not be able to issue an unmodified opinion.
Describe disclosure requirements for loss contingencies
If probable and an amount can be reasonably estimated, then the company must record a liability and a related expense or loss and disclose the relevant details of the event in the notes. If the loss contingency is reasonably possible or the amount cannot be reasonably estimated, then only a disclosure in the notes is required. If the likelihood of a loss contingency is remote, then nothing needs to be disclosed in the notes.
If auditors decide to withdraw from engagement of a public company, the company has to do what?
If the client is a public company, management must report a change of auditors, and the reason for the change, to the SEC using Form 8-K.
What are the parts of the credit sales process?
Initiating sales. Delivering goods. Recording sales.
What is the primary way auditors assess loss contingencies?
Inquire management
What do key controls often rely on? And what should auditors understand about this
Key controls auditors often rely significantly on IT applications to flag potential misstatements. The auditor should understand the logic behind the IT application and how client personnel manually follow up on exceptions on a timely basis
What assertion is the largest risk for loss contingencies and why
Management may not be sufficiently objective and could fail to identify loss contingencies or may classify identified contingencies as remote to avoid accruing or disclosing them. Failing to identify one or more material loss contingencies is a material misstatement.
The risk of ______ is particularly prevalent in the purchasing process.
Misappropriation of assets
Is the engagement partner required to review all audit documentation?
No but they may choose to do so
Credit sales orders should only be accepted when?
Only when they are in accordance with management's authorized criteria.
Purchasing process is synonymous with what?
Procurement process
Explain the appropriate controls over purchasing process disclosures.
Public companies normally control disclosures with a disclosure committee that works with the CFO or controller to review disclosures. The disclosure committee often includes individuals in management and on the audit committee who are knowledgeable about the condition of the company and knowledgeable about appropriate GAAP for disclosures relevant to the purchases process.
If a company is growing, it is common to expect ___________
Purchases, inventory, and accounts payable to grow at approximately the same rates.
Normally, the classes of transactions in the purchasing process include what?What are the two classes with the highest volume of transactions?
Purchasing goods and services (purchasing on credit). Making payments (cash disbursement transactions). Recording purchase adjustments. Purchases and payments are usually the two largest classes
Purchases and accounts payable transactions should be recorded upon the ____________________________. If not, what balances are misstated and how?
Receipt of goods. Purchases and accounts payable may be understated if a company receives goods but then waits to record the transaction until a vendor's invoice is received
Increases in a client's collection period (AR turnover) indicates what?
Receivables are growing faster than sales volumes, which consumes operating cash flows and may lead to liquidity problems. This may be an indication that the company is accomplishing sales growth by taking on increased credit risk.
What is a voucher
Recording of a payable resulting from receipt of goods
The auditor eventually must evaluate whether internal controls are strong or weak for each assertion related to ____, ____, and ____ in order to determine a preliminary audit strategy
Recording sales. Recording cash receipts. Recording sales adjustments and accounts receivable, and reporting relevant disclosures.
What is an example of a key control to test cutoff of cash disbursements?
Run-to-run totals compare beginning daily cash balances with cash disbursed from the cash disbursements journal, plus cash receipts, and the ending daily cash balances. In other words, a run-to-run total starts with the beginning balance and then adds and subtracts transactions. The result should match the ending balance in a balance sheet account. Also, the software compares the vendors approved for payment with the total of the daily cash disbursements journal.
In credit sales, what document represents the start of the transaction trail of documentary evidence?
Sales order
What is one of the most important controls to enact for cash disbursements?
Segregation of duties in performing these subprocesses is a critical internal control.
Describe internal controls in an ERS system
Similar to internal controls for traditional system. Consists of both purchase controls and cash disbursement controls
The auditor will usually test the effectiveness of IT general controls as part of _____?
Testing entity-level controls (i.e. testing control environment through inquiry)
What assertion does the search for unrecorded liabilities test and how is it conducted?
Tests completeness of AP. Commonly conducted via examination of subsequent payments
Tests of controls are performed when the auditor expects ____________
That internal controls are effective.
What must an auditor consider when assessing fraud risk?
The auditor will consider incentives and pressures on management that may push management toward fraudulent financial reporting, such as the nature of management compensation plans or whether management is trying to show a growth trend to investors or meet previously forecasted revenue targets. Auditors should assess the risk that a dominant management may override existing controls. The auditor should also be alert to situations where an employee may have personal reasons to misappropriate assets, such as affording the costs of private schools or universities. An auditor's concerns are heightened when the control environment is weak or control activities are nonexistent. In not-for-profit organizations, smaller companies, or governments, segregation of duties may be weak or nonexistent. In these cases, the auditor with appropriate professional skepticism should consider fraud risk to be high.
What is useful in estimating current year's payables?
The auditor's knowledge of the volume of purchases, combined with prior experience in terms of accounts payable turnover in days (the average number of days it takes to retire payables)
List three factors that might indicate the going concern assumption may be at risk. What audit procedures would detect the factors?
The going concern assumption may be at risk if working capital is not sufficiently high. This could be detected by analytical procedures during risk assessment. The going concern assumption may be called into question if a major customer has stopped doing business with the client. This could be detected by a review of subsequent events. Also, legal developments that hinder a client's ability to operate may threaten the going concern assumption. This could be detected by inquiring with the client's legal counsel.
What is often the only paperwork in the ERS process
The initial contract between the vendor and supplier specifying how data will be exchanged, prices, terms of payment etc
ERS recognizes the key elements of a purchase transaction involve:
The nature and quantity of the goods received. The price of the goods received. The payment terms for the goods received
In the purchasing process, what document represents the start of the transaction trail of documentary evidence in support of management's assertion of occurrence of purchase transactions? What controls should be in place over this document?
The purchase requisition is usually initiated from the warehouse for inventoried items or any department for items that are not in inventory. In an IT system, unique purchase requisitions should be sequentially numbered regardless of the originating department. Creation of electronically prepared requisitions should require entry of a valid employee number. The software uses that number to confirm that the requisition is within the authorization limit set for that employee
What controls should there be over purchase orders?
The purchasing department should have the authority to issue purchase orders only on the receipt of properly approved purchase requisitions. Purchase orders should contain a precise description of the goods and services desired, as well as quantities, price, and vendor name and address. Purchase orders should be prenumbered and accounted for, enabling the tracking of each transaction from initiation, to receipt of goods or services, to recording the purchase, and to final payment. The quantity ordered is generally omitted on the receiving department's copy so that receiving clerks will make careful counts when the goods are received.
What assertions do receiving reports help attest to and how?
The receiving report is an important document supporting the occurrence assertion for purchase transactions. In addition, most companies prepare daily reports of anything received that has not resulted in vouchers (the recording of an accounts payable) to control the completeness assertion for purchases and accounts payable.
Explain how month-end closing procedures might decrease inherent risk in the purchasing process
When vendor's invoices are not received, policies need to be in place to accrue liabilities for items received and significant attention should be paid to month-end cutoff and closing procedures the lower the inherent risk. With strong month-end closing procedures to identify items received but not booked as liabilities, the risk of misstatement associated with cutoff errors is reduced.
What are some disadvantages of using the current ratio as an analytical procedure to test purchases?
While ratios like the current ratio are easy to calculate, they may fluctuate based on influences from processes other than the purchasing process, such as sales or investments.
What does FASB ASC 205 require in terms of going concern assumption
management to make an assessment of the entity's ability to continue as a going concern for the future period of one year beyond the issuance date of the financial statements. Illustration 15.10 provides a timeline example to illustrate management's responsibility.
If auditors determine there is substantial doubt about the entity continuing as a going concern, the next step is
obtaining information about management's plans to mitigate or minimize the adverse effects of the situation. They should be planning to reduce expenses
When auditing purchases, what are the analytical procedures focused on?
the relationship between purchases and AP
