Audit Exam 2

Front 1

3 Steps for using the Audit Risk Model

Back 1

1. Set a planned level of audit risk such that an opinion can be issued on the financial statements.
2. Assess the risk of material misstatement (IR x CR).
3. Use the audit risk equation to solve for the appropriate level of detection risk:

Front 2

RMM and the relationship of the entity's business risk to it.

Back 2

: (Inherent risk X control risk)
Assess the entity's bus. risks >relate those risks to what can go wrong > assess risk of material misstatement (rmm)

Front 3

Qualitative terms for audit risk model

Back 3

very low, low, moderate, high.

Front 4

If Audit Risk is:
-very low
-low
what coul rmm or dr be?

Back 4

high - low
low - high
moderate - moderate

Front 5

3 limitations of the audit risk model

Back 5

-desired level of ar may not be actually chieved
-doesn't consider potential auditor error
-no way of knowing what preliminary level of risk actually was

Front 6

business risks

Back 6

risks that result from significant conditions, events, circumstances or actions that impair mgmt's ability to execute strategies

Front 7

auditor's risk assessment process (4 steps) step 1

Back 7

1. perform risk assessment procedures: inquiries of mgmt etc., analytical procedures, observe. to obtain an understanding of the entity and its enviroment

Front 8

what are the 5 things you look at?

Back 8

1. nature of entity
2. industry, regulatory &external factors
3. obj.s, strategies &bus risks
4. entity perf measures
5. internal control

Front 9

steps 2-4

Back 9

2. identify bus risks that may result in material mstmts in fs's
3. eval risk assessment process (how mgmt responds) to bus risks &obtain evidence of its implementation
4. assess the risk at fs and assertion levels

Front 10

3 ways of gathering evidence

Back 10

-inquiries of mgmt, other personnel, and others outside entity
-analytical procedures
-observation and inspection

Front 11

nature of the entity

Back 11

-entity's organization structure and mgmt personnel
-source of funding
-equity investments
-operating characteristics
-source of earnings

Front 12

ex. of bus risks that auditor considers when developing an Understanding of the Entity's Objectives and Strategies

Back 12

-industry developments
-new products/services
-expansion of bus
-new accting reqs
-reg reqs
-use of IT

Front 13

-Industry,
-Regulatory and
-other external factors

Back 13

-mkt &competition, seasonal activity, product tech, supply avail. &cost
-accting principles/practices, reg framework, taxation
-level of economic activity, interest rates, inflation

Front 14

Errors

Back 14

unintential misstatements:
-mistakes in gathering/processing financial data
-unreason. estimates from oversight
-mistakes in application of accting principles

Front 15

fraud risk identification process

Back 15

intentional misstatements
-communications among audit etam, inquiries of mgmt, analytical procedures, unexpected period-end adj.s

Front 16

risk factors relating to pressure

Back 16

-excessive pressure for mgmt to meet 3rde party expectations
-financial profitability is threatened
-mgmt's personal financial situation is threatened

Front 17

risk factors relating to opportunity

Back 17

-nature of industry
-compex or unstable org. structure
-ineffective monitoring of mgmt
-deficient internal control

Front 18

risk factors relating to rationalization

Back 18

-use of inappropriate accounting based on materiality
-poor comm channels for reporting inappropriate behavior
-commiting to unrealistics forecasts
-weak ethical standards

Front 19

responses to financial statement level risk

Back 19

-emphasize professional skepticism
-assign more experienced staff
-more supervision
-add elements of unpredictability in selection of audit procedures

Front 20

at the completion of the audit, auditor should consider: (2)
then, if materially misstated, should: (2)

Back 20

1. whether acc results affect asses. of bus risk & rmm
2. whether total mstmts acuse fs's to be m.mstd
1. request mgmt to eliminate m.mstmt
2. if not, should issue qualified or adverse opinion

Front 21

if auditor determintes mstmt is or could be from fraud & material, should: (5)

Back 21

-obtain evidence to see if is fraud
-consider implications on other aspects
-discuss matter & further investigation
-consult with legal (if approp.)
-consider withdrawing

Front 22

the auditor should document:

Back 22

-discussions
-procedures performed
-risks of identified m.mstmt &description
-fraud risks that result in addtl procedures
-nature of comm.s about fraud

Front 23

when does the auditor need to report fraud to someone outside of the company?

Back 23

-to comply with legal req.s
-to successor auditor
-in response to subpoena
-to funding agency

Front 24

flow of the relationship of audit evidence to the audit report

Back 24

FS>mgmt assertions about components of FS>Audit procedures>provide evidence on faireness>auditor reaches conclusion based on evidence>audit report

Front 25

Management assertions (6)

Back 25

:assertions about classes of transactions & events for period under audit. occurrence, completeness, classification, cutoff, authorization, accuracy

Front 26

assertions about presentation and disclosure

Back 26

-accuracy and valuation
-completeness
-occurrence and rights and obligations
-classification and understandability

Front 27

assertions about end-of-the-period account balances

Back 27

-existence
-completeness
-rights &obligations
-valuation & allocation

Front 28

Audit Evidence

Back 28

:All the information, from whatever source, used by the auditor in arriving at the conclusions on which the audit opinion is based

Front 29

concepts of audit evidence (3)

Back 29

-nature of audit evidence
-sufficiency & appropriateness of audit evidence
-evaluation of audit evidence

Front 30

Nature of Audit Evidence, ex.s

Back 30

recoreds of initial entries & supporting records, spreadsheets supporting cost allocations, invoices, general & subsidiary ledgers, contracts, adjs to FS's, worksheets

Front 31

Appropriateness of Audit Evidence

Back 31

is a measure of the quality of evidence: Relevance & Reliability:
-independent source of evidence
-effectiveness of IC
-personal knowledge
-documentary evidence
-original docs

Front 32

evaluation of audit evidence

Back 32

proper eval requires an understanding of: 1. types of evidence avail. 2. relative reliability of evidence
--should be THOROUGH in searching for evidence & UNBIASED in its evaluation

Front 33

Audit Procedures

Back 33

:specific acts performed by auditor to gather evidence about wehther specific assertions are being met.
1.risk assess. procedures
2. test of controls
3. substantive procedures

Front 34

audit program

Back 34

a set of audit procedures prepared to test assertions for a component of the FS's

Front 35

examples of audit program for A/R, assertions & ex. of procedures

Back 35

existence: confirm receivables
rights & obligations: inquire if rec. have been sold or pledged
completeness: agree controlling acct with total of subsidiary acct

Front 36

audit procedures for obtaining audit evidence:
-inspection of records & docs:
-inspection of tangible assets
-observation

Back 36

-evidence obtained from external docs> reliable than internal
-physical exam of asset
-process of watching procedure being performed by others

Front 37

vouching
tracing

Back 37

occurrence (books to source docs)
completeness (source docs to books)

Front 38

cont. of audit procedures for obtaining audit evidence
-inquiry

Back 38

in conducting inquiry, should:
-consider knowledge, experience, etc of individual to be questioned
-ask clear, relevant q's
-use open/closed q's appropriately
-listen actively/effectively
-consider reactions &responses
-evaluate the response

Front 39

external confirmation

Back 39

process of obtaining a representation of info. or of existing condition direction from a 3rd party

Front 40

reliability of evidence obtained through confirmations is directly affected by factors such as:

Back 40

-form of confirmaiton
-prior experience with the entity
-nature of info. being confirmed
-intended respondent

Front 41

recalculation

Back 41

determining the mathematical accuracy of docs or recoreds

Front 42

reperformance

Back 42

the auditor's independent execution of procedures or controls that were originally perf'd as part of the internal control system

Front 43

analytical procedures

Back 43

evaluations of financial info. made by a study of plausible relationships among both financial and nonfinancial data

Front 44

scanning

Back 44

review of accounting data to identify significant or unusual items

Front 45

ex. of high reliability evidence, moderate and low

Back 45

-inspection of tangible assets, reformance, recalc
-inspection of records & docs, analytical procedures
-observation, inquiry

Front 46

evidence decision process

Back 46

will tests of control be conducted>(perform tests)>can effective substantive analytical procedures be perf'd? No>perform substantive tests on details, yes>perform, if dont need addtl evidence, than document results. if yes, than perform substantive tests

Front 47

What fills the bucket?

Back 47

-Risk assessment procedures
-tests of controls
-substantive analytical procedures
-substantive tests of details

Front 48

audit documentation

Back 48

auditor's principal record of the audit procedures performed, evidence obtained & conclusions reached

Front 49

2 fuctions of audit doc. (working papers)

Back 49

1. to provide support for the audit report
2. to aid in the planning, performance & supervision of the audit

Front 50

audit documentation should: (3)

Back 50

-demonstrate how audit complied with prof. standards
-support basis for conclusions concerning ea. assertion
-show that records reconciled w/FS's

Front 51

audit documentation should: cont.

Back 51

-include a written audit program
-enable a knowledgeable & experienced reviewer to:
--understand nature, timing, extent, results, evidence & conclusions
--determine who perf'd & reviewed work & dates

Front 52

2 types of audit documentation files

Back 52

permanent files
current files

Front 53

permanent files

Back 53

corporate charter, important contracts, chart of accts, IC doc, org chart, terms of stock and bond issues, accting manual, prior years' analytical procedures

Front 54

current files

Back 54

audit plan/report, audit programs, working TB, mins of mtgs, adjing JE, reclassification JE's, current FS's, working papers supporting accts

Front 55

3 things to include in the format of audit documentation and describe

Back 55

heading: client name, title, year-end date
indexing & cross-referencing: notations that provide a trail from FS's to audit doc.s
tick marks: notations made next to work paper items indicating auditor/reviewer actions.

Front 56

3 characteristics of audit documentation

Back 56

-should be organized
-is property of the auditor, including docs prepared by the client at auditor's request
-Sar-Oxley req.s it be retained for 7 yrs from completion date

Front 57

purpose of preliminary anatlytical procedures

Back 57

assist to understand bus., plan the nature, timing & extend of audit procedures

Front 58

purpose of substantive analytical procedures

Back 58

Used to obtain evidential matter about particular assertions related to account balances or classes of transactions.

Front 59

purpose of final analytical procedures

Back 59

used as an overall review of the financial info in the final review stage of the audit

Front 60

3 types of analytical procedures

Back 60

-trend analysis
-ratio analysis
-reasonableness analysis

Front 61

what info. sources can be used to develop an expectation?

Back 61

-financial &operating data
-budgets & forecasts
-industry publications
-competitor info.
-mgmt's analyses
-analyst's reports

Front 62

the size of a tolerable difference depends on: (5)

Back 62

-significance of the acct
-desired degree of reliance on the substantive analytical procedures
-level of disaggregation in amt being tested
-precision of the expectation
--but amt is always less than planning materiality!

Front 63

when do differences need corroborating evidence?

Back 63

prelim. analytical procedures diff's - is not req'd
final analytical procedure diff's - is req'd

Front 64

3 short term liquidity ratios

Back 64

-current ratio
-quick ratio
-operating cash flow ratios

Front 65

2 important activity ratios

Back 65

-receivables turnover > days outstanding in a/r
-inventory turnover > days of inv on hand
(use industry data when possible)

Front 66

4 Profitability Ratios

Back 66

-gross profit percentage
-profit margin
-return on assets
-return on equity

Front 67

2 coverage ratios

Back 67

-debt to equity
-times interest earned

Front 68

the internal control system should: (2)

Back 68

-ensure that assets and records are safeguarded
-generate reliable info for decision making

Front 69

the auditor uses risk assessment procedures to: 4

Back 69

-obtain an understanding of the entity's IC
-identify types of potential msstmts
-deter. factors that affect risk of mmstmt
-design tests of controls & substantive procedures

Front 70

the auditor's understanding of the IC is a major factor in determining the overall audit strategy. the auditor has a responsibility to: (2)

Back 70

-obtain an understanding of IC
-assess control risk

Front 71

COSO's 3 objectives

Back 71

-reliability of financial reporting (audit of ICs)
-effectiveness and efficiency of operations(conrols may be relevant when relate to data auditor uses)
-compliance with laws and regulations

Front 72

Potential Benefits and Risks to an entity's IC from IT

Back 72

+:consistent application of rules, analysis of info, reduction in control circumvention
-:reliance on systems that are inaccurate, unauthorized changes, pot. loss of data

Front 73

*5 components of IC

Back 73

-control enviroment
-entity's risk assessment process
-IS & related bus processes relevant to fin reporting & comm
-control activities
-monitoring of controls

Front 74

control environment

Back 74

sets the tone of an org. foundation for effective ic. includes attitudes, awareness, policies and actions of mgmt and board concerning entity's ic

Front 75

entity's risk assessment process

Back 75

process for identifying and responding to bus risks and results. includes how mgmt identifies relevant risks, estimates their significance, assesses likelihood & how to manage them

Front 76

entity's IS & related bus processes relevant to fin reporting & comm

Back 76

IS relevant to fin reporting objs (accting system, procedures, records) comm. involves providing an understanding of indiv roles & responsibilities to IC over Fin reporting

Front 77

control activities

Back 77

the policies that help ensure mgmt directives are carried out. automated or manual, have various objs and are applied at various org'al and functional levels

Front 78

monitoring of controls

Back 78

process to assess quality of ic perf over time. involves assessing design and operation of controls on timely basis and taking necessary corrective actions.

Front 79

factors affecting the control environment

Back 79

-comm & enforcdement of ethical values
-commitment to competence
-particip of those charged w/governance
-mgmts philosophy
-org'al structure
-assign. of authority &responsibility
-hr policies and practices

Front 80

examples of circumstances where client business risk can arise or change

Back 80

-changes in operating enviro.
-new personnell
-new technology
-rapid growth
-int'l growth
-new accting pronouncements
0new or diff. IS's

Front 81

an effective accting system gives appropriate consideration to establishing methods and records that will:

Back 81

1. identify/record all valid transac's
2. describe timely in detail for classification of transactions
3. measure proper monetary value
4. determine proper time period
5. properly present transactions and related disclosures

Front 82

4 common categories of control activities

Back 82

-performance reviews
0info processing
-physical controls
-segregation of duties

Front 83

3 aspects of effective monitoring

Back 83

1. establish foundation for control effectiveness
2. design &execute monitoring procedures based on bus risks
3. assessing &reporting results

Front 84

audit risk model formula

Back 84

ar= ir X cr X dr
audit risk= inherent risk X control risk X detection risk

Front 85

how to determine control risk

Back 85

does audtitor tend to rely on controls? no>CR at max, yes>perform tests of controls & document accordingly

Front 86

3 factors that could cause an auditor to choose a substantive strategy (& set control risk at maximum)

Back 86

-controls do not pertain to an assertion
-controls are assessed as ineffective
-testing the effectiveness of controls is inefficient

Front 87

2 aspects of a reliance strategy

Back 87

1. obtain understanding of IC
2. plan to rely on ic & assess control risk below maximum

Front 88

assertions & related control procedures:
-occurrence
--completeness

Back 88

-segregation of duties
-prenumbered docs that are accounted for
-daily/monthly reconciliation of subsidiary records with review
--same

Front 89

-accuracy
--authorization

Back 89

-internal verification of amts &calcs
-monthly reconciliation of subsid. records by an indep person
--general & specific authorization of transactions at important control points

Front 90

-cutoff
--classification

Back 90

-procedures for prompt recording of transactions
-internal review & verification
--chart of accts
--internal review & verification

Front 91

the auditor should obtain an understanding of each of the 5 components of ic to plan the audit. this knowledge is used to: (3)

Back 91

-identify types of potential mstmt
-pinpoint factors that affect RMM
-design tests of controls & substantive procedures

Front 92

5 steps to obtain an understanding of IC

Back 92

Understand:
1. control enviro.
2. entity's risk assessment process
3. IS & comm's
4. control activities
5. monitoring of controls

Front 93

4 ways to document the understanding of IC

Back 93

1. procedures manuals & org'al charts
2. flowcharts
3. IC questionnaires
4. narrative description

Front 94

the effect of entity size on IC

Back 94

likely to be less formal in a small or midsize entity than in a large one

Front 95

3 limitations of an entity's IC

Back 95

1. override of IC by mgmt
2. human errors or mistakes
3. collusion

Front 96

examples of reasons cited for why fraud occured

Back 96

-inadequate IC or compliance programs
-mgmt override of IC
-inadequate oversight
-collusion

Front 97

3 steps to assess control risk

Back 97

1. identify specific controls that will be relied on
2. perform tests of controls
3. conclude on the achieved level of control risk

Front 98

4 steps to perform tests of controls

Back 98

1. inquiry of app. personnel
2. inspect doc.s indicating perf
3. observe application of control
4. reperformance of application of control by auditor

Front 99

documenting the achieved level of control risk should include: (2)

Back 99

-auditor's assessment of CR
-can be doc'd using structured working paper, IC questionnaire, or memo

Front 100

relationship between CR & amount of work

Back 100

CR high (bad IC)= more work
CR low (good controls) = less work

Front 101

2 ways of to time audit procedures

Back 101

1. interim
2. year end

Front 102

interim tests of contorls

Back 102

1. Assertion being tested not significant
2.Control has been effective in prior audits
3.Efficient use of staff time

Front 103

interim substantive procedures

Back 103

1.Assertion probably has low control risk
2.May increase the risk of material misstatements
3.Still requires some year-end testing

Front 104

type 1 report

Back 104

describes org's controls and assesses whether they are suitably designed to achieve specified ic obj's

Front 105

type 2 report

Back 105

Goes further by testing whether the controls provide reasonable assurance that the related control objectives were achieved during the period.

Front 106

material weakness

Back 106

a deficiency(s) in IC, w/reasonable possibility that a material msstmt will not be prevented, detected or corrected

Front 107

significant deficiency

Back 107

a deficiency)s) in IC that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Front 108

2 types of controls in an IT environment

Back 108

general controls
application controls

Front 109

general controls

Back 109

1.Data center & network op.s
2.System software acquisition, change, & maintenance
3.Access security
4.Application system acquisition, development, and maintenance

Front 110

application controls

Back 110

1. data capture controls
2. Data validation controls
3. Processing controls
4. Output controls
5. Error controls

Front 111

types of common data validation controls

Back 111

-limit test
-range test
-sequence check
-existence(validity) tests
-field test
-sign test
-check-digit verification

Front 112

revenue def.

Back 112

inflows of assets of an entity or settlements of its liabilities from delivery or producing goods, rendering services, or other activities that constitute the entity's major or central operations

Front 113

revenue recognition criteria

Back 113

1. persuasive evidence of an arrangement exists
2. delivery has occurred/services rendered
3. price is fixed or determinable
4. collectibility is reasonably assured

Front 114

fraud risks in rev. recognition

Back 114

1. side agreements
2. channel stuffing
3. related party transactions
4. bill and hold sales

Front 115

overview of rev process
-cash sale
-credit sale

Back 115

-purchases>inventory>cash sales
-purchases>inv>credit sales>A/R>cash collection

Front 116

3 types of transactions

Back 116

1. sale of goods/rendering service for cash or credit
2. receipt of cash in pmt for goods/services
3. return of goods for credit or cash

Front 117

accounts affected for the 3 types of transactions

Back 117

-a/r, sales, allow for UA, bad-debt exp
-cash, A/R, cash discounts
-sales returns, sales allowances, A/R

Front 118

LOOK AT TABLE 10-6

Back 118

**

Front 119

Customer Sales Order

Back 119

Contains the details of the type and quantity of products or services ordered by the customer

Front 120

credit approval form

Back 120

For credit sales, the client must have a formal procedure for investigating the creditworthiness of the customer.

Front 121

Open-Order Report

Back 121

A report of all customer orders for which processing has not been completed.

Front 122

Shipping Document

Back 122

This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information.

Front 123

Sales Invoice

Back 123

The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price, and the terms of trade.

Front 124

Sales Journal

Back 124

Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction.

Front 125

Customer Statement

Back 125

This document is mailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions.

Front 126

Accounts Receivable Subsidiary Ledger

Back 126

This ledger contains an account and the details of transactions for each customer.

Front 127

Aged Trial Balance of Accounts Receivable

Back 127

This report summarizes all the customer balances in the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of several past due categories.

Front 128

Remittance Advice

Back 128

This is usually the part of the customer’s bill that should be returned with the payment.

Front 129

Cash Receipts Journal

Back 129

This journal is used to record the cash receipts of the entity.

Front 130

credit memorandum

Back 130

This document is used to record credits for the return of goods by a customer.

Front 131

Write-Off Authorization

Back 131

This document authorizes the write-off of an uncollectible account receivable. Final authorization is generally received from the treasurer.

Front 132

functions of the revenue process
-order entry

Back 132

Acceptance of customer orders for goods and services into the system in accordance with management criteria.//The initial function in the revenue process is the entry of a new sales order into the system.

Front 133

credit authorization function

Back 133

Appropriate approval of customer orders for creditworthiness.//The credit authorization process must determine that the customer is able to pay for the goods or services purchased. Failure to properly authorize credit can lead to extensive bad debts for the entity.

Front 134

shipping function

Back 134

Shipping of goods that has been authorized.//Goods should not be shipped, nor should services be provided without proper authorization. The main control is payment or proper credit authorization.

Front 135

billing function

Back 135

Issuanace of sales invoices to customers for goods shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns..//The objective of proper billing is to ensure that all goods shipped and all services rendered are billed to the customer.

Front 136

cash receipts function

Back 136

Processing of the receipt of cash from customers./All cash collected must be properly identified and promptly deposited intact at the bank.

Front 137

accounts receivable function

Back 137

Recording of all sales invoices, collections, and credit memoranda in individual customer accounts.//All billings, adjustments, and cash collections must be properly recorded in the customers’ accounts receivable records.

Front 138

general ledger function

Back 138

Proper accumulation, classification, and summarization of revenues, collections, and recivables in the financial statement accounts.//As related to the revenue process, the general ledger function must ensure that all revenues, collections, and receivables are properly recorded and classified.

Front 139

4 inherent risk factors that may affect the revenue process are:

Back 139

1.Industry-related factors.
2.complexity & contentiousness of revenue recognition issues.
3.difficulty of auditing transactions & acct balances.
4.Misstmts detected in prior audits.

Front 140

3 aspects of control risk assessment

Back 140

1. understand & doc rev. process based on a reliance strategy
2. plan & perform tests of controls on rev transactions
3. set & doc the control risk for the rev process

Front 141

the entity's risk assessment process

Back 141

auditor should estimate the significance of the risk & assess teh likelihood of occurrence

Front 142

4 things that contribute to an auditor's knowledge

Back 142

-process by which sales, cash receipts, returns are initiated
-flow of each from initiation to inclusion in fin stmts
-records, doc.s & accts involved in sales/receipts/returns
-process used to prepare estimates

Front 143

monitoring of controls

Back 143

auditor must understand how mgmt assesses the design and operation of controls. include how personnel review who performs the controls & evaluate the perf of the IT function

Front 144

in order to properly set control risk, the auditor must test controls over the rev process. such tests may include.. (5)

Back 144

-Inquiry of client personnel.
-inspection of docs/records
-observations of op of the control
-walkthroughs
-reperformance of the control procedures

Front 145

Set and Document the Control Risk

Back 145

If the results of the tests of controls support the planned level of control risk, the auditor conducts the planned level of substantive procedures for the account balances.

Front 146

The auditor is concerned about two major types of material misstatements in regards to occurence of revenue transactions:

Back 146

1.Sales to fictitious customers.
2.Recording revenue when goods have not been shipped or services have not been performed.

Front 147

Controls concerning completeness include:

Back 147

(1) accounting for numerical sequence of shipping documents and sales invoices, (2) matching shipping documents with sales invoices,
(3) reconciling sales invoices to daily sales reports
(4) maintaining and reviewing the open-order file.

Front 148

what misstatement concerns the auditor when considering the Completeness assertion in regards to rev transactions?

Back 148

-goods are shipped/services are performed and no revenue is recognized.

Front 149

what misstatement concerns the auditor when considering the Authorization and Accuracy of Revenue Transactions? and what can counteract it?

Back 149

-imporper authorization include shipping goods/services for customers who are bad credit riksks & make sales at unauthorized prices/terms.
-an authorized price list and terms
-invoice verified for mathematical accuracy before being sent to customer

Front 150

what misstatement concerns the auditor when considering the Cutoff and Classification of Revenue Transactions? and what can counteract it?

Back 150

-Sales recorded in the wrong accounting period unless proper controls are in place.
-All shipping documents forwarded to billing department daily.
-chart of accts & proper codes for recording transactions

Front 151

cont

Back 151

The use of a chart of accounts and proper codes for recording transactions should provide adequate assurance about the proper classification of revenue transactions.

Front 152

what misstatement concerns the auditor when considering the Occurrence assertion in regards to cash receipt transactions?

Back 152

that cash receipts are recorded but not deposited in the client’s bank account.

Front 153

what misstatement concerns the auditor when considering the completeness assertion in regard to cash receipts? and what control is related?

Back 153

- cash/checks are stolen/lost before being recorded
- Proper segregation of duties and a lockbox system are strong controls relating to completeness

Front 154

what misstatement concerns the auditor when considering the accuracy of cash transactions? and what control is related?

Back 154

-wrong amt of cash recorded from remittance advice
-receipt incorrectly processed during data entry
--daily remittance reports reconciled to listing of advices
--bank stmts reconciled monthly

Front 155

what misstatement concerns the auditor when considering the cutoff and classification of cash receipts transactions? and what control is related?

Back 155

-cash recorded in wrong period, if use lockbox system or deposited daily
--seldom have major concerns about this

Front 156

what misstatement concerns the auditor when considering the control activities & tests of controls for sales returns & allow.s? and what control is related?

Back 156

not usually a material amt
-credit memo can be used to cover unauthorized shipment of goods or conceal misappropriation of cash
-all credit memos should be properly authorized

Front 157

what are the 2 types of tests used and describe for auditing revenue related accts

Back 157

1. substantive analytical procedures - used to examine plausible relationships among rev. accts
2. tests of details - focus on transactions/bal.s/disclosures & EB & disclosures for A/R and related accts

Front 158

ratios used for comparative purposes within substantive analytical procedues

Back 158

1. receivables turnover & days outst. in A/R
2. Aging categories on aged TB of A/R
3. Bad-debts exp as % of rev
4. allow for UA as % of A/R or Credit sales
5. lg customer accts bal.s compared to last period

Front 159

examples of substantive tests of transactions for each assertion for a/r, allow for UA, bad-debt exp

Back 159

O-trace invoices back to Cust order & shipping docs
Comp-trace shpping docs to invoice & JE/ledger
AA-compare price/terms
Cu-compare dates
Cl-examine invoices for proper classification

Front 160

examples of tests of details for each assertion about account balances

Back 160

E-confirm A/R
R&O-bank confirm.s, inquire of bank mgmt
C-review aged TB, trace docs (if haven't already)
V&A- examine results of confirm.s & adequacy of allow for UA

Front 161

completeness of tests of details of accts balances

Back 161

Reconciliation of the aged trial balance to the general ledger account should detect an omission of a receivable from either the subsidiary or general ledger.

Front 162

cutoff test - tests of details
-what is the key document?

Back 162

attempts to determine whether all rev transactions & related accts are recorded in proper period (shipping doc is key document)

Front 163

existence and rights and obligations - tests of details

Back 163

important for A/R cuz auditor wants to know the bal is not overstated thru ficticious cust accts or amts.
-confirmation is major procedures used(to deter. that all a/r are owned by entity)

Front 164

valuation and allocation - tests of details

Back 164

a/r should be shown on BS at net realizeable value (gross amt - allow for UA)
- must verify adequacy of the allow for UA (prepare aged TB & discuss w/ credit manager, compare with last yrs results)

Front 165

3 major issues related to presentation, disclosure and classification

Back 165

1. identifying & reclassifying any material credits in A/R
2. segregate ShT & LT receivables
3. ensure that diff types of receiv.s are properly classified

Front 166

describe Confirmation Process – Accounts Receivable

Back 166

-direct written response from 3rd parties about a/r bal
-good source of evidence
-should be controlled by the auditor

Front 167

**under what circumstances can an auditor not do confirmations on A/R (omit confirmations)

Back 167

- the amt is immaterial
-use of conf.s wouldn't be effective
-IR & CR are low and evidence gathered from other substantive tests is sufficiently to reduce AR to acceptably low level (needs to be really good to use!)

Front 168

3 factors affecting the reliability of A/R confirmations

Back 168

-type of conf request (pos/neg)
-prior experience w/client (response rate, accuracy)
-the intended respondent (competency, knowledge, objectivity)

Front 169

2 types of confirmations and describe

Back 169

positive: indicate whether they agree w/ amt due, response is expected either way.
negative: requests cust only respond when disagree w/amt due. -used only when has many small acct bal.s & Cr is assessed low

Front 170

timing of confirmations

Back 170

A/r may be confirmed at an interim date or year-end
-sjhould be sent soon after end of period to max response rate

Front 171

confirmation procedures

Back 171

-mail requests outside client's facilities
-record kept
-2nd request may be needed

Front 172

**3 alternative procedures (when there is no response to a confirmation

Back 172

1. example subsequent receipts(did they pay in whole soon after period was over)
2. examine supporting docs(order, shipping, invoice)
3. examine other client documentation

Front 173

other types of receivables that are reported on BS

Back 173

-receibables from officers/employees
-receiv.s from related parties
-N/R

Front 174

how are other receivables handled?

Back 174

each are confirmed and evaluated for collectibility
-related parties=examined for "arms length"
-n/r= conf'd & examined for repmt terms & int inc properly recog'd

Front 175

likely misstatement < tolerable misstatement

Back 175

accept the account as fairly presented (good)

Front 176

likely misstatement > tolerable misstatement

Back 176

account is not fairly presented (bad)