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55 Cards in this Set

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What do auditors emphasize in tests of details of balances?
balance sheet accounts
Does this ignore income statement accounts? Why/why not?
This doesn't ignore income statement accounts because the income statement accounts are tested as a by-product of the balance sheet tests. Example, auditor confirms accounts receivable balances and finds overstatement caused mistakes in billing customers, than both accounts receivable and sales are overstated.
What is the most important test of details of accounts receivable?
Confirmation of accounts receivable.
What do audit procedures selected and sample size depend on?
Depends on whether planned evidence for a given objective is low, medium, or high.
What are most tests of A/R and allowance for uncollectible accounts based off of?
Aged trial balance
Aged trial balance
An aged trial balance lists the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of sale and the balance sheet date.
Ordinarily info on the aged trial balance is used first for
detail tie in before any other tests to verify that the population being tested agrees with the general ledger and accounts receivable master file.
What must be footed on the aged trial balance?
The total column and the columns depicting the aging must be test footed and the total on the trial balance compared with the general ledger
What type of tracing should an auditor do in regards to the aging trial balance?
They should trace a sample of individual balances to supporting documents such as duplicate sales invoices to verify the customer's name, balance, and proper aging.
What does the extent of the aged trial balance detail tie in depend on?
The number of accounts involved, the degree to which the master file has been tested as a part of tests of controls and substantive tests of transactions, and the extent to which the schedule has been verified by an internal auditor or other independent person before it is given to the auditor.
What is the most important test of details of balances for determining existence of recorded accounts receivable?
Confirmation of customer's balances.
Existence
Confirmation
What happens when customers do not respond to confirmations?
When they don't respond, auditors also examine supporting documents to verify the shipment of goods and evidence of subsequent cash receipts to determine whether the accounts were collected.
Do auditors normally examine shipping documents?
No just for nonresponses of confirmations
What can auditors do to test for account balances omitted from aged trial balance?
The only way it will be discovered if for the auditor to foot the accounts receivable trial balance and reconcile the balance with the control account in the general ledger.
Why is it hard to test for account balances omitted from the aged trial balance?
Because of the self balancing nature of the a/r master file.
Completeness
foot accounts receivable trial balance and reconcile balance with general ledger.
If all sales to a customer are omitted from the sales journal can tests of details of balances discover this?
NO
Why aren't confirmations for customers with a zero balance reliable?
Because research shows that customers are unlikely to respond to requests that indicate their balances are understated. In addition unrecorded sales to a new customer are difficult to identify because that customer is not included in the A/R master file.
What is the best way to uncover understatements of accounts receivable and sales?
Substantitive tests of transactions for shipments made but not recorded (completeness objective for tests of sales trans) and by analytical procedures.
What is the most comon test for accuracy of accounts receivable?
Confirmation of accounts selected from the trial balane.
What happens when confirmations to confirm accuracy are ignored?
When customers do not respond to confirmation requests, auditors examine supporting documents in the same way as for existing. Examine documents for shipping and cash receipts.
How do auditors evaluate classification of accounts receivable?
By reviewing the aged trial ablance for material receivables from affiliates, officers, directors or other related parties.
What should an auditor verify in regards to A/R classification
Should verify notes receivable or accounts that should be classified as noncurrent assets are separated from regular accounts, and significant credit balances in A/R are reclassified as A/P
What has a close relationship to A/R classification
Presentation and disclosure
What must the auditor do to satisfy classification balance related objective?
They must determine whether the client has correctly separated different classifications of A/R this includes determining whether related parties have been separated on aged trial balance.
To satisfy presentation and disclosure objective what must an auditor do?
The auditor must make sure classifications are properly presented by determining whether related party trans are shown correctly in the financial statements during completion phase of the audit.
Cut off misstatement
Occurs when current period trans are recorded in subsequent period or vice versa.
What is the objective of the cutoff test?
To verify whether trans near the end of the accounting period are recorded in the proper period. The cutoff objective is one of the most important because misstatements in cutoff can significantly affect current period income and materially overstate net earnings.
Why is cutoff objective one of the most important?
The cutoff objective is one of the most important because misstatements in cutoff can significantly affect current period income and materially overstate net earnings.
Where can cutoff misstatements occur?
1. sales
2. Sales returns and allowances
3. Cash receipts
Auditors take a threeforld approach to determine reasonableness of cutoff:
1. Decide on appropriate criteria for cutoff
2. Evaluate whether the client has established adequate procedures to ensure reasonable cutoff
3. Test whether cutoff was correct.
What is the most imp part of evaluating the client's method of obtaining a reliable cut off?
To determine the procedures in use. When a client issues prenumbered shipping documents sequentially, it is usually a simple matter to evaluate and test cutoff. SEgregation of duties between shipping and billing function also enhances the likelihood of recording trans in the proper period.
When internal controls are adequate how can an auditor determine cutoff?
By obtaining the shipping document number for the last shipment made at the end of the period and comparing this number with current and subsequent period recorded sales.
How does an auditor determine sales cutoff?
By comparing recorded sales with related shipping documents for the last few days of the current period and the first few days of the subsequent period.
What do accounting standards require in regards to sales returns and allowances?
SAles returns and allowances must be matched with related sales if the amounts are material. In current period shipments are returned in subsequent period, the sales return should appear in the current period. For most com they are recorded in the accounting period in which they occur under the assumption of approximately equal offsetting amounts at the beginning and end of each acct. period.
When the auditor is confident client recorded all sales returns promptly what tests are requred
they examine supporting documents for a sample of sales returns and allowances recorded during several weeks subsequent to the closing date to determine the date of the original sale.
If amounts reocrded in subsequent period are significantly different then what must an auditor consider?
Must consider an adjustment. A company may experience an increase in sales returns when it launches a new product.
Why is a cash receipts cutoff less importnt?
Because the improper cutoff of cash affects only the cash and A/R balance not earnings accounts,.
How do auditors test cash receipts for cutoff misstatements?
By tracing recorded cash receipts to subsequent period bank deposits on bank statement. If a delay of several days exists this could be a cutoff misstatement.
What is it hard to determine?
IT's hard to determine a cutoff mistatement to a nromal timing difference.
Accounting standards require accounts to be reported at
amount that will ultimately be collected.
Realizable value of A/R equals
gross A/R minus allowance for uncollectible accounts.
How is allowance calculated
client estimates total A/R it expects uncollectible. Clients can't predict the future precisely, but it is necessary for the auditor to evaluate whether the client's allowance is reasonable considering all avaliable facts.
When they evaluate for allowance for uncollectible accounts where does an auditor begin?
Begins by reviewing tests of controls concerned with client's credit policy. If unchanged results of creditpiolicy and credit approval are in line with preceding year change should reflect only changes in econ conditions and sales volume.
What do auditors evaluate adequacy of allowance by examining
noncurrent accounts of aged trial balance to see which ones havent been paid subsequent to balance sheet date. Size and age of unpaid balances can be compared with prev years to see whether amount of receivables is increasing or decreasing over time.
What else can they do?
Can examine credit files, talk to credit manager, and review client correspondence.
What are the 2 shortcomings auditors face in evaluating allowance by reviewing individual noncurrent balances on aged trial balance
1. Current accounts are ignored establishing adequacy of allowance even though some of these amounts will likely become uncollectible.
2. It is hard to compare results of prev years on such an unstructured basis. If they are becoming progressively uncollectible over several years, this fact can be overlooked.
What can the auditor do to overcome these shortcomings?
Auditor can establish a history of bad debt write offs over a period of time as a frame of reference.
After satisfied with allowance for uncollectible, easy to verify bad debt expense assume
1. Beginning balance verified in prev audit.
2. Uncollectible accounts written off confirmed as substantive test of trans.
3. ending balance has been verified by various means.
4. Bad debt is a residual balance verified by recalculation
Clients rights to A/R normally cause no problems because
they usually belong to cleint
When can they caus problems
When they have been pledged as collateral, assigned to someone else, factored, or sold at discount. Normally a cleint wouldn't know this
To uncover when this happens auditors
review minutes, discuss with client, confirm with banks, examine debt contracts for evidence of pledging, and examine corresponding files.
Tests for presentation are usually done
at the conclusion of the audit bur are sometimes dne confurrently
an important part of evaluation includes
deciding whehteer client has separated material amounts requireing separate disclosures in the statements. For example, A/R from officers and affiliated companies must be segregated from A.R from customers if they are materil.