Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
28 Cards in this Set
- Front
- Back
1. Explain the following management assertions about classes of transactions: Occurrence Completeness Authorization Accuracy Cutoff Classification |
Occurrences – relates to whether all recorded transactions and events have occurred and pertain to the entity Completeness – related to whether all transactions and events that occurred during the period have been recorded Authorization – relates to whether all transactions have been properly authorized Accuracy – addresses whether amounts and other data relating to recorded transactions have been recorded appropriately. Cutoff – relates to whether transactions and events have been recorded in the correct accounting period. Classification – concerned with whether transactions and events have been recorded in proper accounts. |
|
2. Explain the following management assertions about accounting balances: Existence Rights and Obligations Completeness Valuation and Allocation |
Existence – addresses whether ending balances of assets, liabilities, and equity interests included in the financial statements actually exist at the date of financial statements. Rights and obligations – address whether the entity holds or controls the rights to assets included on the financial statements, and that liabilities are the obligations of the entity. Completeness – addresses whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included. Valuation and allocation – addresses whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. |
|
3. How do auditors use management assertions during their examination of financial statements?
|
The assertions provide a road map for the auditor in determining what evidence to collect regarding various items. Also help guide the auditor in determine the audit procedures to collect the needed evidence. |
|
4. Explain the association between possible misstatements management assertions and procedures for gathering evidence
|
Auditors identify high risk types of misstatements while planning the engagement Each type of misstatement occurs because one or more management assertions have been violated Auditors design procedures to gather evidence for testing those high risk assertions Look at examples provided in table 5-3 on page 137 |
|
5. What two factors influence the quantity of evidence auditors gather, and how do those factors influence auditor decisions about evidence?
|
The risk of material misstatement and the quality of the audit evidence gathered influence the quantity. The greater the risk results in more evidence needed, while the higher the quality results in less evidence needed. |
|
6. For what two reasons do auditors usually rely on evidence that is persuasive, but not convincing?
|
The auditor only examins a sample of the transaction that composes the class of transactions or account balance Due to nature of evidence, auditors must often rely on evidence that is not perfectly reliable |
|
What five characteristics increase the reliability of evidence? |
Independent source outside the entity Effectiveness of internal control Auditors direct personal knowledge Documentary evidence Original documents |
|
8. Describe how auditors perform each of the following procedures for gathering evidence: Inspection of records or documents Inspection of tangible assets Observation Inquiry Confirmation Recalculation Reperformance Analytical procedures Scanning |
Inspection of record or documents- examining internal or external records or documents that are in paper form, electronic form, or other media. Inspection of tangible assets - consists of physical examination of the asset. Auditors usually inspects or counts a tangible asset. Observation - consists of looking at a process or procedure being performed by others. Examples are observing of the counting of inventories, observation of performance of control activities. Inquiry - Seeking information of knowledgeable persons (both financially and non financial) within the entity or outside the entity Confirmation - represents audit evidence obtained by the auditor as a direct response to the auditor from a third party (the confirming party) in paper form or by electronic or other medium. Confirmations also are used to obtain audit evidence about the absence of certain conditions. Recalculations - checking the mathematical accuracy of documents or records. Recalculations can be performed manually or through the use of information technology Reperformance - involves the independent execution by the auditor of procedures or controls that were originally performed by company personnel. Analytical procedures - consists of financial and non-financial data. It is used to accomplish 3 purposes: Risk assessment procedures, substantitive analytical procedures, final analytical procedures Scanning - review of accounting data to identify significant or unual items. this includes the searching for large and unusual items in the accounting records, as well as reviewing transaction data for indications or errors that have occured |
|
Describe (a) when each of the following docs and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Customer sales order Credit Approval Form Open Order Report Shipping Document Sales Invoice Sales Journal Customer Statement |
Customer Sales Order
(a) Created when the customer orders from EarthWear (b) They CSO is entered into the revenue system to begin the process, and contain the details of the order. CreditApproval Form (a) When a customer purchases on credit (b) The information in this form isused to judge a customers credit worthiness, and give them a credit limit Open-OrderReport (a) A report of all customer orders, where processing has not been completed (b) Used to keep track of orders that still must be completed, viewed daily or weekly - ShippingDocument (a)Prepared anytime anytime goods are shipped to the customer (b) Serves as a bill of lading, used to initiate the billing process
SalesInvoice (a) Created when the order has been fulfilled and revenue can be recognized (b) Used to bill the customer
SalesJournal (a) When a sales voice is issued it is recorded into the sales journal (b) This issued to keep track of all sales, including the specific details of all of the sales CustomerStatement (a) Usually mailed to the customer monthly (b) Used to capture a detailed summary of all sales, cash receipts, and credit memorandum transactions processed through the customer’s account for the period |
|
Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used: Accounts Receivable subsidiary ledger Aged trial balance of accounts receivable Remittance advice Cash receipts journal Credit Memorandum Write off authorization |
Accounts Receivable subsidiary ledger (a) When a transaction is recorded in the sales journal and the cash receipts journal (b) Contains details of transactions with each customer Aged trial balance of accounts receivable (a)Prepared weekly or monthly (b) Summarizes all accounts in the subsidiary ledger, reported in aging categories to monitor collection of receivables Remittance advice (a)Mailed with the customer’s bill and returned with the customer’s payment (b)Contains information on which invoice is being paid by the customer Cash receipts journal (a)Maintained throughout the revenue cycle (b)Records cash receipts Credit memorandum (a)Created when goods are returned (b)Records credits for the return of goods Write-off authorization (a) Either created in the normal stream of sales, or as a separately authorized transaction(b) Used to authorize the write off of an uncollectible account |
|
Describe the (a)purpose for and (b) documents used in the following major functions of therevenue cycle: Order entry Credit authorization Shipping Billing Cash receipts Accounts receivable General ledger |
Order entry (a) Entry of new sales (b) Customer sales order Credit authorization (a) Determines that the customer is able to pay for the goods or services (b) Credit approval form Shipping (a) Authorizes the shipping of goods, or providing of services (b) Shipping document Billing (a) All goods shipped and services provided are billed at authorized prices (b) Shipping documents Cash receipts
(a) Ensures that all cash collections are properly identified and promptly deposited intact into the bank (b) Remittance advice Accounts receivable (a) Ensures that all billings, adjustments, and cash collections are properly recorded in customers A/r records (b) Sales invoice,remittance advice, and credit memoranda General ledger (a) Ensure that all revenues, collections, and receivables are properly accumulated, classified, and summarized in the accounts (b) All documents probably affect the general ledger |
|
What four factors influence the inherent risk of misstatement? |
1.) Industry-related factors 2.) The complexity and contentiousness of revenue recognition issues 3.) The difficulty of auditing transactions and account balances 4.) Misstatements detected in prior audits |
|
What three steps do auditors take to set control risk when a reliance strategy has been chosen for revenue processes? |
1.) Understand and document the revenue process based on a reliance strategy 2.) Plan and perform tests of controls on revenue transactions 3.) Set and document the control risk for therevenue process |
|
What three factors influence the type of test auditors choose to perform on internal controls? |
1.) Volume of transactions or date
2.) The nature and complexity of the systems by which the entity processes and controls the information 3.) The nature of the available evidence, including audit evidence in electronic form |
|
Identify the management assertion violated by each of the following misstatements, and describe a control procedure that would help prevent or detect that misstatement: Recording revenue for inventory that was not shipped Shipping inventory but not recording revenue Shipping goods to a customer with an unacceptable credit rating Recording revenue in the wrong accounting period |
Recording revenue for inventory that was not shipped -Occurrence; Record sales only with approved customer order and shipping document- Shipping inventory but not recording revenue -Completeness;Shipping documents matched to sales invoices
Shipping goods to a customer withan unacceptable credit rating -Authorization;Proper procedure for authorizing credit, and shipping goods- Recording revenue in the wrong accounting period -Cutoff;All shipping documents forwarded to the billing function daily |
|
Describe two categories of substantive procedures |
1.) Substantive analytical procedures; used to examine plausible relationships among related accounts 2.) Tests of details of classes of transactions,account balances, and disclosures; concentrates on the detailed amounts ofestimates that make up the ending balance for revenue- related accounts |
|
Describe a test ofdetails that provides evidence about the following management assertions |
Occurrence for sales revenue Completeness for sales revenue |
|
Describe how (a) an error that violates the completeness assertion for accounts receivable could occur, and (b) a test of details that could detect that error. |
(a) Items are missing from the accounts receivable ledger (b) Review of monthly bank reconciliation |
|
Describe how (a) an error that violates the cutoff assertion for sales revenue could occur, and (b) a test of details that could detect that error. |
(a) Revenue earned in the next period is recorded in the current period, or revenue from the current period is pushed into the next reporting period (b) Review shipping documents to see when revenue was actually earned and compare them tothe sales invoice for recording revenue |
|
Describe how (a) an error that violates the existence assertion for accounts receivable could occur, and (b) a test of details that could detect that error. |
(a) Items in the accounts receivable ledger do not belong (b) Send confirmations to the clients about the billings |
|
Describe how (a) an error that violates the rights and obligations assertion for accounts receivable could occur, and (b) a test of details that could detect that error. |
(a) Items in the accounts receivable ledger are not owned by us, they have been factored out (b) Sendc onfirmations to banks confirming that they have no obligations to our receivables, or check cash receipts for a cash inflow from factoring receivables |
|
Describe how (a) an error that violates the valuation assertion for accounts receivable could occur, and (b) a test of details that could detect that error.Allowance for Doubtful accounts is estimated appropriately |
(a) Allowance for Doubtful accounts is estimated appropriately to report an accurate netrealizable value for accounts receivable (b) Check what the allowance account estimate is for similar sized company in the same market. Calculate it yourself as well. |
|
Under what three circumstances can auditors choose not to confirm accounts receivable? |
1.) The accounts receivable balance is immaterial 2.) External confirmations would be ineffective 3.) The auditors assessed level of risk of material misstatement at the relevant assertion level is low, and other planned substantive procedures address the assessed risk |
|
Describe two types of confirmation requests. -Positive confirmation -Negative confirmation |
Positive confirmation; requests that customers indicate whether they agree with the amount due stated in the confirmation Negative confirmation; requests that a customer respond only when they disagree with the amount due to the client. |
|
Under what four conditions are auditors likely to use negative confirmation requests? |
1.) The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion 2.) The population of items subject to negative confirmation procedures comprises a large number of small, homogenous account balances, transactions, or conditions 3.) A very low exception rate is expected 4.) The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests |
|
What steps must auditors take when they do not receive a response for:
-Positive confirmation -Negative confirmation |
-Positive confirmations Must use alternative procedures to verify the amount owed -Negative confirmations Nothing, not responding indicates they agree with the amount owed |
|
Describe four procedures that auditors could choose to perform when positive confirmations are not returned? |
1.) Send second, or third confirmation requests 2.) Examination of specific subsequent cash receipts 3.) Examination of shipping documentation 4.) Examination of other client documentation |
|
Describe how auditors evaluate the evidence they gather to form an opinion about whether accounts receivable is fairly stated. |
The auditor determines an aggregate misstatement, which is then compared to the tolerable misstatement. If the aggregate misstatement is smaller the auditor may accept the account as fairly presented. |