Auditing Chapter 10

Front 1

What are "inflows or other enhancements of assets of an entity or settlements of its liabilities (or combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity's major or central operations.

Back 1

Revenue (as defined by FASB Statement of Financial Accounting Concepts No. 6)

Hint 1

The main process or function of a business

Front 2

What 2 conditions must be met before revenue can be recognized?

Back 2

1) revenue must be realized or realizable

2( revenue must be earned

Front 3

What does it mean that "revenue is realized or realizable"?

Back 3

Revenue is realized when a product or service is exchanged for cash, a promise to pay cash, or other assets that can be converted to cash.

Front 4

What does it mean that "revenue is earned"?

Back 4

Revenue is earned when an entity has substantially completed the earning process, which generally means a product has been delivered or a service has been provided.

Front 5

What is CHANNEL STUFFING?

Back 5

Is a marketing practice that suppliers sometimes use to boost sales by inducing distributors to purchase substantially more inventory than they can promptly sell.

Front 6

Why is channel stuffing a concern for auditors?

Back 6

An auditor should be alert to the practice known as Channel stuffing because it is a fraud risk related to revenue recognition.

Front 7

What 4 fraud risks related to revenue recognition should an auditor be alert to?

Back 7

1. Side agreements which are arrangements used to alter the terms and conditions of recorded sales in order to entice customers to accept delivery of goods and services.

2. Channel stuffing

3. Related party transactions require special consideration because these transactions may be difficult to identify and may pose significant "substance over form" issues.

4. Bill and hold sales (also called "parked inventory schemes") - unless certain conditions are met, these arrangements do not qualify as a sale because delivery has not occurred.

Front 8

What are positive confirmations? When are these more likely to be used? Why do these sometimes provide more reliable information?

Back 8

A confirmation is audit evidence that is a direct written response from a third party (the confirming party) to the auditor.

Accounts receivable confirmations are generally a good source of evidence for testing the existence assertion. Positive accounts receivable confirmations request that customers indicate whether they agree with the amount due to the client stated in the confirmation. Thus, a response is required regardless of whether the customer believes the amount is correct or incorrect. Sometimes an auditor will use a "blank" form of positive confirmation, in which the request requires the customer to provide the amount owed to the client. Positive confirmations are generally used when an accounts individual balances are large or if errors are anticipated because the risk of material misstatements has been judged to be high.

Front 9

What are negative confirmations? What are the drawbacks for using negative confirmations?

Back 9

Negative accounts receivable confirmations request that customers respond only when they disagree with the amount due to the client. This type of confirmation is used when there are many accounts with small balances, control risk is assessed to be low, and the auditor believes that the customers will devote adequate attention to the confirmations.

A major drawback to using negative confirmations is that a "non response" may just mean that the confirmation was ignored and discarded. For this reason, negative confirmations provide little assurance. They may be most useful to " top off" an assurance bucket that is nearly full from other forms of audit evidence.

Front 10

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve:

A. Cash disbursements

B. Write offs of customer accounts

C. Employee overtime wages

D. Credit granted to customers

Back 10

B. Write offs of customer balances.

The credit function should be segregated from the billing function. If one individual has the ability to grant credit to a customer and also has the responsibility for billing that customer, it is possible for sales to be made to customers who are not credit worthy. This can result in bad debts.