Mcconnel Chapter 14 Minitest

Front 1

How do auditors obtain an understanding of internal control?

Back 1

Using one or more typical approach for sales, auditor's study the client's flow charts, make inquiries of the client using an internal control questionaire and perform walkthrough tests of sales.

Front 2

Four essential steps to assess control risk:

Back 2

1. Need a framework to assess control risk.
2. Auditpr must identify key internal controls and deficiencies for sales.
3. After identifying controls and deficiencies, the auditor associates them with the objectives.
4. Auditor assess control risk for each objective by evaluating the controls and deficiencies for each objective.

Front 3

1. Need a framework to assess control risk.

Back 3

The six transaction related objectives provide this framework. These six objectives are the same for every audit of sales.

Front 4

2. Auditpr must identify key internal controls and deficiencies for sales.

Back 4

These will differ for every audit because every client has different internal controls.

Front 5

3. After identifying controls and deficiencies, the auditor associates them with the objectives.

Back 5

Okay

Front 6

4. Auditor assess control risk for each objective by evaluating the controls and deficiencies for each objective.

Back 6

This step is critical because it affects the auditor's decisions about both tests of controls and substantive tests. It is a highly subjective decision.

Front 7

Key control activities for sales

Back 7

1. Adequate separation of duties
2. Proper authorization
3. Adequate documents and records
4. Prenumbered documents
5. Monthly statements
6. Internal verification procedures

Front 8

Adequate separation of duties helps

Back 8

prevent various types of misstatements due to both errors and fraud

Front 9

What should managers do to prevent fraud?

Back 9

Adequate separation of duties management should deny cash access to anyone responsible for entering sales and cash receipts transacton info into the computer. The credit-granting function should be separated from the sales function, because credit checks are intended to offset the natural tendency of sales personnel to optimize volume even at the expense of bad debt write offs. Personnel responsible for doing internal comparisons should be independent of those entering the original data.

Front 10

The auditor is concerned about authorization at three key points.

Back 10

1. Credit must be properly authorized before a sale takes place.
2. Goods should be shipped only after proper authorization
3. Prices, including basic terms, freight, and discounts, must be authorized.

Front 11

What is the purpose of the first two controls?

Back 11

Meant to prevent loss of company assets by shipping to fictivious customers or those who will fail to pay for goods.

Front 12

Price authorization is done to

Back 12

ensure that the sale is billed at the price set by company policy.

Front 13

How are authorizations done?

Back 13

Can be done for an individual transaction or for specific class of transactions.

Front 14

Adequate documents and records

Back 14

Adequate record keeping procedures must exist before most of the transaction related audit objectives can be met. Some companies automatically prenumber sales invoices at the time a customer order is received.

Front 15

What are copies of sales orders used for?

Back 15

Copies of sales orders are used to approve credit, authorize shipment, record number of units shipped, and bill customers.

Front 16

What does having prenumbered sales invoices affect?

Back 16

This system greatly reduces the chance of failure to bill a customer if all invoices are accounted for periodically, but controls have to exist to ensure the sale isn't recorded until shipment occurs.

Front 17

Prenumbering

Back 17

Meant to prevent both failure to bill or record sales and the occurrence of duplicate billings and recordings. Doesn't do much good to have prenumbered documents unless they are properly accounted for. To use this control effectively, a billing clerk will file a copy of all shipping documents in sequential order after each shipment is billed, while someone else will periodically account for all numbers and investiage the reason for any missing documents.

Front 18

Monthly statements

Back 18

Sending monthly statements is a useful control because it encourages custmers to respond if the balance is incorrectly stated.

Front 19

Who should control the statements

Back 19

These ststements should be controlled by persons who have no responsibility for handling cash or recording accounts receivable to avoid intentianal failure to send the statements.

Front 20

Who should disagreements in account balances go to?

Back 20

They should be directed to a designated person who has no responsibility for handling cash or recording sales/a/r.

Front 21

Internal verification procedures

Back 21

Compare programs or independent personnel should check that the processing and recording of sales transactions fulfill each of the 6 transaction objectives. Examples include accounting for numerous sequence of prenumbered documents, checking the accuracy of document preparation and reviewing reports for unusual or incorrect items.

Front 22

After auditors identify the key internal controls and control deficiencies what do they do?

Back 22

They assess control risk

Front 23

For audits of accelerated filer public companies what must teh auditor do?

Back 23

Must perform extensive tests of key controls and evaluate the impact of the deficiecies on the autitor's report on internal control over financial reporting. The extent of testing controls in audits of non-accellerated public filing companies depends on effectiveness of controls.

Front 24

The extent of testing controls in audits of non-accellerated public filing companies depends

Back 24

on effectiveness of controls and the extent to which the auditor believes they can be relied on to reduce control risks to determining the extent of reliance to place on controls, the auditor also considers the cost of increased tests of controls compared to the potential reduction in substantive tests.

Front 25

For each key control what is necessary?

Back 25

For each key control one or more tests of controls must be designed to verify its effectiveness. In most audits, it is relatively easy to determine the nature of the test of the control from the nature of the control. If internal control is initial customer orders after they have been approved for credit the test of control is to examine the customer order for proper initials.

Front 26

To provide evidence of occurrence and completeness objective what can an auditor do?

Back 26

They can check the sequence of sales invoices selected from the sales journal and watch for duplicate and omitted numbers or invoices outside the normal sequence. IF they select 100 invoices completeness will be satisified if all 100 are recorded. Occurrence wil be satisified if there is no duplicate recording of any transaction.

Front 27

How are appropriate controls for separation of duties determined?

Back 27

REstricted to auditors observations of activities and discussions with personel. For example, it is possible to observe whether the billing clerk has access to cash whhen income mail is opened. Also necessary to ask personnel and see if there are circumstances where their duties differ from normal such as when cashier is on vacation billing person may take over cashier position.

Front 28

How can auditors check whether credit is properly approved?

Back 28

They can atempt o initiate transactions the exceed customer's credit limit. If control is working sale should be rejected.

Front 29

Why is determinig proper substantive tests of transactions procedures for sales diffuicult?

Back 29

Because they vary considerably depending on the circumstances.

Front 30

Some audit procedures

Back 30

fulfill more than one transaction related audit objective.

Front 31

Recorded sales occur-auditor concerned with three types of misstatements

Back 31

1. Sales included in journal for which no shipment was made.
2. Sales recorded more than once.
3. Shipments made to nonexistent customers and recorded as sales.

Front 32

What do these 2 misstatements result in and what are the consequences?
1. Sales included in journal for which no shipment was made.
2. Sales recorded more than once.

Back 32

Fraud
significant because they laead to an overstatement of assets and income

Front 33

Unintential overstatements are

Back 33

more easily discovered because it results in an overstatement of accounts receiveable which a client can detect by sending monthly statements to customers.

Front 34

Fraudtulent overstatements

Back 34

Will be concealed making it more difficult for it to be discovered. Substantive tests of transactions may be necessary to discover overstated sales in these circumstances.

Front 35

What do appropriate substantive tests of transactions for testing occurrence depend on?

Back 35

Depends on where the auditor believes misstatements are likely. Many auditors do substantive tests of transactions for the occurrence objective only if they believe a control deficiency exists.

Front 36

Recorded sale for which there was no shipment

Back 36

Auditor can vouch selected entries in the sales journal to related copies of shipping and other supporting documents to make sure they occurred. IF the auditor is concerned about the possibility of a fictitious duplicate copy of a shipping document, it may be necessary to trace amounts to perpetual inventory records as a test to see if inventory was reduced.

Front 37

Sale recorded more than once

Back 37

Duplicate sales can be determined by reviewing a numerically sorted list recorded sales transactions for duplicate numbers. Also can test for proper cancellation of shipping documents. Proper cancellaton decreases the likelihood a shipping document wil be used to record another sale.s

Front 38

Shipment to nonexistent customers when does it occur?

Back 38

Normally occurs when person recording sales also is in a position to authorize shipments

Front 39

shipment to nonexistent customers are difficult to detect if

Back 39

i.c. are deficient

Front 40

shipment to nonexistent customers to test what should they do

Back 40

Auditor can trace customer info on sales invoice to a master file. These revenue frauds are often called sham sales. Can also trace credit in a/r to source. If receivable was actually collected in cash or goods were returned a sale must have origiannally occurred. If credit was for bad debt or credit memo or if balance was unpaid could indicate inappropriate transaction.

Front 41

Existing transacions are recorded. what objective do we not test for and why?

Back 41

Typically no substantive tests of trans are done for completeness because overstatements are more likely than understatements and overstatements represent a greater source of audit risk.

Front 42

Existing transacions are recorded if controls are deficient

Back 42

substantive tests are necessary

Front 43

Existing transacions are recorded how to test for unbilled shipments

Back 43

Can trace shipping documents from a file in shipping department to related duplicate sales invoices and sales journal.

Front 44

Tracing

Back 44

Tests omitted transactions (Completeness objective)

Front 45

Vouching

Back 45

Tests for nonexistent transactions (occurrence objective)

Front 46

To test for occurrence how does an aditor do it?

Back 46

Starts by selecting invoices FROM journal and vouches them to duplicate sales invoices, shipping documents, and customer orders.

Front 47

How does an auditor test for completeness objective?

Back 47

To test completeness the auditor starts by selecting shipping documents and traces them TO duplicate sales invoices and the sales journal as a test for omissions.

Front 48

The accurate recording of sales concerns 3 things

Back 48

1. Shipping the amount of goods ordered
2. Accurately billing for the amount of goods shipped.
3. Accurately recording the amount blled in the accounting records.

Front 49

What do auditors do in every audit to ensure sales are accurately recorded?

Back 49

They do substantive tests of transactions to ensure each of the se aspects of accuracy are done correctly by recalculating information in the accounting records and comparing info on different documents.

Front 50

The comarison of tests of controls and substantive tests of transactions for accuracy objective is a good example of how audit time can be saved when efficient internal controls exist.

Back 50

Test of control for this objective takes almost no time because it involves examining only an initial or other evidence of internal verification. If this is effective, the sample size for substantive tests of transactions can be reduced, yielding a significant savings.

Front 51

Sales trans. are included in master file and correctly summarized.

Back 51

Proper inclusion of sales in A/R master file is essential becuaes accuracy of these records affects client's ability to collect outstanding receivables. Similarly, the sales journal must be correctly totaled and posted to general ledger if financial statements are to be corrected.

Front 52

Sales trans. are included in master file and correctly summarized. what tests can an auditor do to ensure these are correct?

Back 52

Can perform clerical accuracy tests such as footing the journals and tracing the totals and details to the general ledger and the master file to check whether there are errors or fraud in the processing of sales transactions.

Front 53

Tracing is typically done as

Back 53

part of filing other transaction related audit objectives.

Front 54

footing and tracing

Back 54

are typically done as separate audit procedures.

Front 55

When footing and comparisons are restricted to Sales trans. are included in master file and correctly summarized. audit objectives

Back 55

the transaction related audit objective is posting and summary.

Front 56

When journals, master files, or ledgers are traced to or from a document the objective

Back 56

is one of the other five objectives and varies on what is being verified.

Front 57

REcorded sales are correctly classified

Back 57

Must ensure transactions are charged to correct g/l account and should not debit accounts receivable for a cash sale or credit sales for collection of receivables.

Front 58

REcorded sales are correctly classified when is this usually tested?

Back 58

Proper classification is usually tested as a part of testing for accuracy. They examine supporting documents to determine the proper classification of a given transaction and compare this with the actual amount to which it is charged.

Front 59

Sales are recorded on correct dates

Back 59

Should be billed and recorded as soon as possible after shipment takes place to prevent unintentianal omission of transactions from the records and to make sure that sales are recorded in the proper period. Timely recorded transactions are also less likely to contain misstatements. Significant differences indicate potential cutoff problems in the test of year-end balances.

Front 60

key existing controls

Back 60

Mangement designs internal controls for sales to achieve the 6 transaction related audit objectives. If controls necessary to satisfy any one of the objectives are inadequate, the likelihood of misstatements related to that objective is increased, regardless of the controls for the other objectives.

Front 61

deficiencies

Back 61

Deficiencies identified indicate the absence of effective controls. Auditor should evaluate deficiencies by considering potential misstatements that could occur. Can respond to deficiency by expanding substantive tests of transactions to determine whether the deficiency resulted in a significant number of misstatements.

Front 62

After procedures are designed they must be

Back 62

run

Front 63

What does combining the design format audit program and the perforance audit program get?

Back 63

1. Eliminates duplicate procedures.
2. Makes sure that when a given document is examined, all procedures are performed on that document are done at that time.
3. Enables auditor to do procedures in the most effective order. For example, by footing the journal and reviewing for unsual items, the auditor gets a better perspective in doing the detailed tests.