Exam 3 Study Set

Which of the follow is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Allowing for greater management oversight of incompatible activities

Dual-purpose procedure

An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year.

PCAOB assertion example: Trace a sample of sales invoices to perpetual inventory record entry of issue.

Completeness

Audit procedure example: Vouch sales and cash receipt transactions occurring near period end

Cutoff of transactions

PCAOB assertion example: Select a sample of inventory item perpetual records and vouch additions to receiving reports

Existence

Audit procedure example: Confirm a sample of receivables by direct communication with the debtors

Existence of assets

T/F: The production cycle only applies to manufacturing companies

False; applies to retailers with some modifications

T/F: GAAS requires auditors to be present to observe the client's physical inventory count regardless of the size of the inventory.

False; when inventory is significant

Audit procedure example: 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

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Have customers send payments directly to the company's depository bank

Which of the following should be performed by the persons opening the mail and recording payments

Restrictive endorsement on all checks

Sales invoice

The bill sent to the customer that indicates the amount due and the payment terms.

Test of controls: Classification of accounts receivable

Trace posting of intercompany sales, sales returns, etc., to sales

PCAOB assertion example: Review the appropriateness of standard costs to price inventory issues and cost of goods sold.

Valuation

Bill of lading

a legal contract that defines responsibility for goods while they are in transit

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

accounts receivable listing

The use of scanners and computers improves

accuracy and efficiency

An auditor assess the risk of material misstatement because it:

affects the level of detection risk that the auditor may accept

________ needs to be assured in order to recognize revenue.

collectibility

The overall physical inventory is generally taken by

company personnel

Auditors review items in the pending order file for evidence of the _____ of recorded sales and accounts receivable

completeness

Test of controls are designed to test production accounting in two directions: __________ and _________

completeness occurrence

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

Tracing shipping documents before and after year0end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the ________ assertion

cutoff

Verifying the dates on the sales documents helps reduce the risk of misstatement related to the ________ assertion of revenue.

cutoff

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

cutoff policies

According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include:

designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention

When the auditors were not present for the count of beginning inventory they must _______ _____ opinion on the income statement

disclaim an

Because fictitious sales may be used to overstate assets, the ________ assertion is important in the audit of accounts receivables and the _______ assertion is important for sales

existence occurrence

Confirmations provide evidence of ________ and _________ and __________, but not ________

existence rights and obligation valuation

The most significant risks in the production cycle often relate to the ______ and _______ of inventory

existence valuation

In the audit of accounts receivable, the most important emphasis should be on the

existence assertion

The risk of material misstatement is a combination of

inherent and control risk

The mail which includes payments should be opened by two people. This control is called:

joint custody

To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.

large

If the risk of material misstatement is high, inventory observations and test counts should be scheduled

near the year-end date

A strong entity-level control in the revenue process is

overall performance review by management

The file that contains sales transactions that were initiated in the system but are not yet completed is the

pending order master

If auditors assess control risk at the maximum level, they will tend to:

perform a great deal of substantive testing during the audit

A record of all counts must be obtained and used for the existence-direction tests if a company does not maintain _______ inventory records

perpetual

Because a small misstatement in inventory can result in a much larger error in net income, auditors identify inventory as a ________ error

pervasive

When auditors are satisfied that controls have been examined and transactions and balances have been appropriately tested, they must still consider

presentation and disclosure

The acquisition cycle is linked to the revenue cycle through the _______ cycle

production

A company's cost accountant periodically reconciles job cost sheets to the work-in-process inventory accounts. This reconciliation is most likely performed to provide assurance that

production accounting and posting is complete

One of the most critical jobs in any manufacturing operation is

production planner

Generally accepted auditing standards states that analytical procedures:

should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit

Person who perform cost accounting functions _____ _____ be in charge of production and inventory planning

should not

To prevent the client from adding inventory items by creating more at a later date, it is critically important to know which _______ _______ or count sheets were or were not used.

tag numbers

The audit procedures used in an observation of the client's physical inventory taking are designed primarily to

test and observe the client's physical count of inventory

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

the adequacy of the disclosure of the related party transactions

Production plan

the schedule for manufacturing designed to ensure quality goods are available at the appropriate time for the lowest cost

Reviewing accounts for collectability and determining the adequacy of the allowance for doubtful accounts is done in support of the _____ assertion

valuation

The pricing and compilation tests audit for

valuation

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, ________ is a high risk assertion.

valuation

Holding supervisors accountable for production is an important component of control over _____ _____ _____ inventory

work in process

The most difficult inventory control issues relate to

work in process

Ways to determine if a company has factored accounts receivable include

~Inquiring of management ~Examining support for large csh receipts

Access to accounts receivable records gives an individual

~Recording responsibility ~Authorization

Which of the following would most likely be classified as a material weakness?

Ineffective oversight of the financial reporting process by the company's audit committee

To be effective, auditor tests of control in the revenue cycle must be performed using _____ _______ tests of controls

dual direction

Management may have fraudulently overstated revenue by making _____ journal entries

inappropriate

An auditor will usually trace the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide evidence that items physically present and observed by the auditor at the time of the physical inventory count are

included in the final inventory schedule

If a confirmation exception cannot be resolved, the auditor should

determine the cause

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except:

do nothing for immaterial balances

Production activities start a marketing projection based on past performance and marketing initiatives called a

sales forecast

Sales are normally recorded on the date of the:

sales invoice

If a control is missing or ineffective

~Auditors need to design substantive procedures related to control failure ~The risk of material misstatement increases

Justifications for not using confirmations may include:

~Confirmations would be ineffective ~Other procedures provide sufficient, competent evidence ~Receivables are not material

Characteristics of negative confirmation

~Customers are expected to considerate confirmations properly ~Risk of material misstatement is low ~A large number of small balances exist

The sales detail (journal) file can be checked for

~Fictitious sales ~Sales recorded before shipment

It is important to maintain an up-to-date customer master file to ensure

~Files are accurate ~Credit limits are appropriate

Characteristics of positive confirmation

~Individual balances are relatively large ~Accounts are in dispute

SEC criteria for revenue recognition

~Persuasive evidence of arrangement exists. ~Delivery has occurred or services have been rendered. ~The seller's price to the buyer is fixed or determinable. ~Collectability is reasonably ensured.

Difficulties in estimating the allowance for doubtful accounts can be due to

~Revised credit policies ~Changing economic conditions ~Changing environment ~Changed products

When retailer accepts third-party credit cards

~authorization function is performed electronically ~nonpayment shift to third party in exchange for a processing fee ~data security becomes a significant issue ~considered cash sales

Customer statements

~help with control over cash receipts ~Detail what has been billed and paid

The documents that authorize the inventory record keepers to update the raw material inventory files are the

~materials requisition or materials transfer ticket ~production order

Observation can be used to help determine

~physical controls over inventory ~separation of duties in the inventory area ~proper inventory authorizations

To help detect inventory fraud auditors should

~sample lower-value inventory items ~look for excessive amounts of an inventory item

Inventory Errors and their effects

~unrecorded receipt of inventory- inventory:understated, Cost of sales: no effect ~December sales recorded in January- Inventory: No effect, Cost of sales: No effect ~December purchase recorded in January- Inventory: Understated, Cost of sales: No effect ~Inventory omitted during physical count- Inventory: Understated, Cost of Sales: Overstated ~Consigned out inventory omitted during physical count- Inventory: Understated, Cost of sales: Overstated ~Unrecorded shipment of inventory- Inventory: Overstated, Cost of Sales:Understated

ABS transaction assertion example: Job cost sheet entries are reviewed by a person independent of their preparation

Accuracy

Test of controls: Accuracy of revenue

Observe client comparing shipping quantities to quantities recorded as sold. Examine evidence of client making the comparison.

What are substantive procedures basic purpose?

Obtain direct evidence about account balances.

What are test of controls basic purpose?

Obtain evidence about the company's performance of its own control activities.

Cycle counts

Physical counts of selected inventory throughout the year

An auditor is examining a nonpublic company's inventory procurement system and has decided to perform tests of controls. Under which of the following conditions should the auditor perform tests of controls?

The auditor believes that testing the controls could lead to a reduction in overall audit time and cost

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

The client requests alternative procedures be performed instead

Test of controls: Cutoff of revenue

Trace shipping date on shipping documents to sales invoice date. Check FOB terms

T/F: Prenumbered documents are an example of an internal control.

True

For each error/control objective, identify the assertion about classes of transactions and events most benefited by the control. a. Sales recorded, goods not shipped b. Goods shipped, sales not recorded c. Goods shipped to a bad credit risk customer d. Sales billed at the wrong price or wrong quantity e. Product line A sales recorded as Product line B f. Failure to post charges to customers for sales g. January sales recorded in December

a. occurence b. completeness c. accuracy d. accuracy e. classification f. completeness g. cutoff

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

accomplished

From the auditors' point of view, inventory counts are more acceptable prior to the year end when

accurate perpetual inventory records are maintained

To help assess the allowance for doubtful accounts, auditors use the

aged trail balance

Side _________ can substantially alter the terms of a sale.

agreements

Receivables that have been sold should not remain as an ____ on the company's books.

asset

A red flag indication bribed and kickbacks may be seen in an unexpected increase in

raw materials

To be recognized, revenue must be

~realized or realizable ~earned

T/F: RFID technology eliminates the need for a second count.

True

T/F: RFID technology switches the major focus to sampling items.

True

T/F: Substantive procedures are ALWAYS done to the revenue cycle.

True

T/F: The manipulation of inventory has a double effect on financial statements

True

PCAOB assertion example: Select a sample of shipping documents and review the accounting summary of the quantities and prices

Valuation

Audit procedure example: Compare the amount of credits given to customers in the subsequent period to the amount estimated by management

Valuation of assets

Test of controls: Accuracy of revenue and accounts receivable

Vouch prices to approved price listing.

Which of the following steps would not normally be included in a program for a physical inventory observation?

Vouch unit prices to vendors' invoices or other cost records

A small business owner can best offset the lack of separation of duties by:

Being actively involved in the accounting process

ABS transaction assertion example: The production supervisor is required to account for all material and labor used as direst and indirect

Classification

Which of the following would be considered an analytical procedure?

Comparing inventory balances to recent sales activities

ABS transaction assertion example: All documents are prenumbered and the numerical sequence is reviewed

Completeness

An auditor selected a product maintained in the finished goods warehouse. The auditor counted the product and compared this amount with the amount in the finished goods perpetual inventory subsidiary account. Which ASB balance assertion is the auditor most likely testing?

Completeness

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's balance assertion of

Completeness

PCAOB assertion example: Trace posting of sample of sales invoices to amounts in general ledger.

Completeness

Audit procedure example: 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

ABS transaction assertion example: Payroll reviews the allocation of payroll for pay periods that begin in one reporting period and end in the next reporting period

Cutoff

Test of controls: Completeness of revenue and accounts receivable

Examine evidence of client review and follow-up of sales data related to specific classes of products or locations.

The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion?

Existence

When considering relevant assertions and obtaining evidence about accounts receivable and other assets, auditors must emphasize the __________ assertion.

Existence

Inventory observation must be observed if inventory is one of the major assets listed on the balance sheet.

False

T/F: RFID technology eliminates the need for a physically count.

False

T/F: Standard costing is an acceptable, recognized method per GAAP.

False

T/F: Substantive procedures are the same as test of controls in their basic purpose.

False

T/F: The sales forecast is the document that production uses to determine what to produce and when to produce it

False

ABS transaction assertion example: Labor usage reports are compared to job time tickets

Occurrence

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions?

Occurrence

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

One of the cashiers has been covering a personal embezzlement by lapping

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Performing cutoff procedures for shipping and receiving

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to:

Required receiving reports to support all credit memorandums before they are approved

Audit procedure example: Review confirmations of liabilities to determine if receivables have been sold

Rights to assets

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to:

Sales invoices with shipping documents

For each of the tests of controls for sales and receivables, indicate the assertion that is supported by selecting the appropriate option from the dropdown.

Scan sales invoices for missing numbers in sequence - Completeness Perform arithmetic recalculation of a sample of recorded sales invoice - Accuracy For a sample of recorded sales, determine whether credit was approved - Accuracy Trace a sample of credit memos to postings in customers' accounts - Completeness Select a sample of customer accounts and vouch debits to sales invoice - Occurrence

T/F: A comparison of the prior year's sales forecast with actual sales may provide an indication of slow moving inventory.

True

T/F: If auditors want to use a sales forecast for audit decisions overall tests fro reasonable should be performed.

True

Packing slip

a document listing the quantity and description of each item included in a shipment

Negative confirmation

a form sent to a customer by auditors requesting that the customer respond only if the balance shown on it is incorrect

Positive confirmation

a letter sent to a customer by auditors requesting that the customer respond whether the balance shown on it is correct or not

A specification of the type and quantity of components required for production is found on the

bill of materials

An automated procedure designed to test all items in a population in order to identify violations of particular control activity is called ______ testing

exception

An audit plan of substantive procedures for cash would not include:

request a cutoff bank statement be mailed to the client

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

revenue

Sales must be realized or reliable and earned in order to be recorded under the accounting standards related to _______ ________

revenue recognition

Auditors must verify that items held on consignment are not included in inventory to address the ______ assertion.

rights

If there is an intervening period between the count date and year-end, additional inventory _____ ______ auditing procedures must be performed on transactions during that period

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