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65 Cards in this Set

  • Front
  • Back
Types of Transactions that are typically processed through the revenue process
-Sale of goods or rendering of a service for cash or credit
-Receipt of cash from sutomer in payment for goods or services
-return of goods by the customer for credit or cash
Accounts effected by sales transacion
-AR
-Sales
-Allowance for uncollectible accounts
-bad debt expense
Accounts effect by Cash Receipt Transactions
-Cash
-Accounts Receivable
-Cash Discounts
Accounts effected by sales return and allowance trancations
Sales Returns
Sales Allowances
AR
The Major Functions of the Revenue Process
Order Entry
-Credit Authorization
-Shipping
-Billing
-Cash Receipts
-Accounts Receivable
-General Ledger
Credit should be seperated from what? Why?
Billing....if one has ability to grant credit to customer an dhas responsiblity for billing it is possible for sales to be made to customers who are not creditworth
Shipping should be segregated from what? Why?
Billing....if one is responsible for shipping and billing it is possible for unathorized shipment to be made and for usual billing procedures to be circumvented. This can result in unrecorded sales transaction and theft.
Accounts Receivable should be segregated from what? Why?
General Ledger...if one is responsible for ar records and also for general ledger, its possibl to conceal unauthorized shipemnt. This can result in unrecorded sales transactions and theft of goods
Cash receipts should be segregated from what?
Accounts REceivable....if one has access to both cash receipts and accounts receivable it is possible for cash to be diverted and shortage of cash in recordes to be covered. Theft in cash may happen.
Inherent risk factors affectin revenue process
1. industry related factors
2. Complexity and contentiousness of revenue recognition issues
3. Difficult of auditng transactions and account balances
4. isstatements detected in prior audits
Major Steps in Setting Control Risk for Revenue Process
1. Understand and document the revenue process based on a reliance approach
2. Plan and perform tests of controls on revenue transactions
3. Set and document the control risk for the revenue process
Assertions about Classes of Tranactions and Events for the Period Under Audit
Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classifcation
Assertions about Account Balances
Existence
Rights and Obligations
Completeness
Valuation and Allocation
Assertions about Presentation and Disclousre
Occurrenca nd rights and obligations
Completeness
Classifcation and understandbility
Accuracy and Valuation
Substantive Analytical Procedures
used as a substantive procedure to obtain evidential matter abiut particular assertions related to account balances or classes of transacitons
Transaction Assertion: Occurence Substantive Test
trace sales invoices back to customer oders and shipping documents
Transaction Assertion: Completeness Substantive Test
Trace sample of shipping document to the details of the sales invoices and to sales jounral and customers accounts receivable subsidiary ledger
Transaction assertion:
Authorization and Accuracy Substative Test
Comparison of prices and terms on a sample of sales invoices with authorized price list and terms of trade
Transaction Assertion:
Cutoff
Substantive Test
Comparison of dates on a smaple of sales invoices with dates of shipment and with dates they were recorded in the sales journal
Transaction Assertion:
Classification
Substative Test
Examine a sample of sales invoices for proper classification into revenue accounts
Balance Assertions:
Existence
Substantive Test
1. Confrimation of selected accounts receivable
2. Performance of alternative procedures for ar confirmation exceptions and nonresponses
Balance Assertions:
Rights and Obligations
Substantive Test
Review of bank confirmations for any liens on receivables
2. inquiry of management, review of any loan agreements, and review of board of directors minutes for any indication that the ar have been sold
Balance Assertsion:
Completeness
Substantive Test
1. Obtaining of aged trial balance of ar and agreeing total to general ledger control accounts
2. Review results of testing the completeness asertion for sassessing control risk; tracing of shipping documents into sales journal and to AR Subsidiary ledger if such teting was not performed as a test of controls
Balance Assertion:
Valuation and Allocation
Substantive Test
1. Examination of the results of confirmations of selected AR
2. Examination of the adequacy of the allowance for uncollectible accoutns
Presentation and Disclosure Assertions:
Occurrenc and rights and obligations
Substantive Test
Deterimine whether any receivables have been pledged, assigned, or discounted. Determine if such items require disclosure.
Presentation and Disclosure Assertions:
Completeness
Substantive Test
Complete financial reporting checklist to ensure that all financial statement disclosures related to AR and related accounts have been disclosed
Presentation and Disclosure Assertions:
Classification and Understandability
Substantive Test
1. Review of aged trial balance for material credits, long term receivables, and notrade receivables. Deterine whether such items require separate disclosure on the balance sheet
2. Read footnotes to ensure that required disclosures are understandable
Presentation and Disclosure Assertions:
Accuracy and Valuation
Substantive Test
Read footnotes and other infomration to ensure that the infomration is accurate and properly presented at the appropriate amoutns
Lapping
process of covering a cash shortage by applying cash from one customers accounts receivable against another customers accounts receivable
Negative Confirmation
Confimration request to which the customer only responds if amount or info is wrong
Positive Confirmation
Confirmation request to which customer says whter or not he or she agrees with the amount
Reliance Strategy
Audtior relies on Internal Controls
Substantive Tests of Transactions
tests to detect errors or fraud in individual transactions
Alternative Procedures for confirmation of Accounts Receivable
1. Examination of subsequent cash receipts
2. Examination of customer orders, shipping documents and duplicate sales invoices
3. Examination of other client documentation
Consignment
Inventory that is in the possession of the customer, but is still owned by the supplier
Are sales invoices independently compared with customers’ orders for prices, quantities, extensions, and footings?
(State Assertion, Test of Control, Substantive Test)
1.Accuracy
2.Examine indication of internal verification on invoices
3. Recompute a sample of invoices and trace details to shipping documents, price lists and customer orders.
Are sales orders, invoices, and credit memoranda issued and filed in numerical sequence and are the sequences accounted for periodically?
(State Assertion, Test of Control, Substantive Test)
-Occurrence and completeness

-Account for the numerical sequence of sales orders, invoices and credit memoranda.

-Trace a sample of shipping documents to sales invoices and the sales journals (and the other direction). Confirm accounts receivable. Examine credit memoranda support.
Are the selling and cash register functions independent of the cash receipts, shipping, delivery, and billing functions?
(State Assertion, Test of Control, Substantive Test)
-Occurrence and completeness

-Discuss procedures with personnel and observe procedures being performed.

-Trace a sample of shipping documents to the sales invoice, sales journal, and accounts receivable master file (go the other direction). Trace a sample of cash receipts to the accounts receivable master file, deposit slip and the bank statement.
Is the collection function independent of and does it constitute a check on billing and recording sales?
(State Assertion, Test of Control, Substantive Test)
-Completeness and Accuracy

Discuss and observe procedures with personnel

-Trace from shipping documents to the sales invoice to the sales journal and accounts receivable master file. Trace shipping documents to the cash receipts journal to see if payments have been made. Confirm accounts receivable.
Are accounts receivable master files balanced regularly to control accounts by an employee independent of billing functions?
(State Assertion, Test of Control, Substantive Test)
-Accuracy

-Review master file for indication of internal balancing. Observe balancing being performed.

-Foot journals and trace postings to accounts receivable master file and general ledger.
Are cash receipts recorded by persons independent of the mail-opening and receipts-listing functions?
(State Assertion, Test of Control, Substantive Test)
-Completeness

-Discuss procedures with personnel and observe procedures being performed.

-Trace prelisting of cash to deposit slip and cash receipts journal. Confirm accounts receivable.
Are receipts deposited intact daily on a timely basis?
(State Assertion, Test of Control, Substantive Test)
-Cutoff and Completeness

-Compare date per books to the date that the deposit appears on the bank statement and the deposit slip.

-Trace cash from the prelist to the cash receipts journal, the deposit slip, and the bank statement.
Are sales generated through the company’s Web site automatically recorded in the sales system?
(State Assertion, Test of Control, Substantive Test)
-Completeness and Cutoff

-Review sequence of online shipping documents (screens).

-Trace a sample of online shipping documents (screens) and trace to the sales invoice, sales journal, and accounts receivable master file.
Examine a sample of shipping documents to determine whether each has a sales invoice number included on it.
(analytical procedure, test of control, substantive test of transactions, or test of detail account balances.....2. general audit or control objective being satisfied)
Test of control

completeness
Discuss with the sales manager whether any sales allowances have been granted after the balance sheet date that may apply to the current period
(analytical procedure, test of control, substantive test of transactions, or test of detail account balances.....2. general audit or control objective being satisfied)
Test of detail accounts balances

Cutoff
Add the columns on the aged trial balance and compare the total with the general ledger.

(1.Type of audit procedure: analytical procedure, test of control, substantive test of transactions, or test of detail account balances.
2. Give the general audit objective or control objective being satisfied.)
Test of detail account balances.

Accuracy or Completeness.
Observe whether the controller makes an independent comparison of the total in the general ledger with the trial balance of accounts receivable.


(1.Type of audit procedure: analytical procedure, test of control, substantive test of transactions, or test of detail account balances.
2. Give the general audit objective or control objective being satisfied.)
Test of control

Accuracy
Compare the date on a sample of shipping documents throughout the year with related duplicate sales invoices and the accounts receivable master file

(1.Type of audit procedure: analytical procedure, test of control, substantive test of transactions, or test of detail account balances.
2. Give the general audit objective or control objective being satisfied.)
Test of Transactions

Cutoff
Compute the ratio of allowance for uncollectible accounts divided by accounts receivable and compare with previous years.


(1.Type of audit procedure: analytical procedure, test of control, substantive test of transactions, or test of detail account balances.
2. Give the general audit objective or control objective being satisfied.)
Analytical procedure

Valuation
For what period of time doe sthe going concern assessment apply?
1 year past B. S. Date
When seraching for contingent liabilities, whtat is the primary assertion the auditor is concerened about? What are two challenges with auditing for contingent liabilities?
Completeness

1. Estimability
2. Likelihood of liability
For what period of time is the auditor responsible for actively seraching for subsequent events?
Financial Statement Date -> Issuance of the Audit Report
Whit respect to dual dating on the audit report, why whould the auditor not want to just change the date on teh audit opinion to the second date?
Because this would cause him to take on extra liability. He would be responsible for everything to that date.
Finaly analytical procedures generally include
considering unusual or unexpected account balances that were not previously identified
Elements of the Auditor's Standard Unqualified Report
1. Title
2. Adressee
3. Introductory Paragraph:
4. Scope Paragraph
5. Opinion Paragraph
6. Explanatory Paragraph
7. Name of Auditor
8. Date of Report
5 Situations that may require auditor to modify wroding or add explanatory language to unqualified report
1. opinon based in part on the report of another auditor
2. Going concer
3. Auditor agreement with a departure from GAAP
4. Lack of consistency int he financial statements due to accounting changes
5. Emphasis of a matter
3 Changes Affecting Consitency and where reported
1. Change in accounting principle
2. Change in reporting entity
3. Correction of an error principle

Notes of Financial Statements and REquires explanatory paragraph
4 Changes not Affecting Consistency and where reported
1. Change in accounting estimate
2. Correction of an error that does not involve an accounting principle
3. Change in classification and reclassification
4. Change expected to have a material future effect

Normally reported in notes of financial statements but does not require explaatory paragraph
3 Conditions for Departure from unqualified opinion
1. Scope Limitation
2. Departure from GAAP
3. Lack of independence of audito
3 types of reports other than unqualifid and when they are used
Qualified- scope limitation or departure from GAAP Exists but overall the financila statements present fairly in conformity with GAAP

2. Disclaimer- insufficient appropriate evidence to form an opnion

3. Adverse- do not present fairly due to GAAP departure that materially affects the financial statements overall.
The COSO Framework
Control Environment
Risk Assesment
Control Activities
Information and Communication
Monitoring
Three magnitudes of Internal Control Deficiency
Material Weakness
Significant Defiiciency
Control Deficiency
Internal Control Deficiency:
Material Weakness
-deficiency, or combo of deficiencies, such that there is a reasonable possiblity that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis
Internal Control Deficiency:
Significant Deficiency
-control deficiency, or combo of, that is less severe than a material wekaness, yet important enough to merit attention by those responsible for oversight of the company's finanicla reporting
Internal Control Deficiency:
Control Deficincy
-exists when design or operation of a control does not allow mangement or employees in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.