11.1 Flashcards
During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the “balance owed as of December 31 was paid on January 9, Year 2.” The auditor would most likely
Verify that the amount was received.
Responses to confirmation requests that involve significant differences are investigated by the auditor. Others are delegated to client employees with a request that explanations be given to the auditor. Such differences often arise because of recent cash payments. In that event, the auditor should trace remittances to verify that stated amounts were received.
Which of the following audit procedures would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions?
Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales journal.
The completeness assertion relates to whether all transactions that should have been recorded in the accounting records were included. Thus, unrecorded shipping documents would indicate that not all transactions are being properly recorded.
An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?
The form was mailed by the controller.
The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used for specific deposits and loans. A confirmation is signed (requested) by the client, but it should be sent by the auditor. Thus, the auditor should control confirmation requests and responses. Control means direct communication between the intended recipient and the auditor to minimize possible bias of the results because of interception and alteration of the requests or responses.
An entity’s financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by
Scanning the general journal for unusual entries.
The general journal is a book of original entry used for transactions not suitable for recording in the special journals (sales, purchases, cash receipts, cash disbursements). Entries involving unusual combinations of accounts are more likely to appear in the general journal than in one of the special journals, which are designed to record large numbers of similar items. For example, credit sales (debit accounts receivable, credit sales) are entered in the sales journal.
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may
Be unaware of all the financial relationships that the bank has with the client.
The standard form is designed to substantiate only the information that is stated on the confirmation request. Thus, the auditor should be aware that the standard form is not intended to elicit evidence about the completeness assertion. The individual completing the form may not be aware of all the financial relationships that the bank has with the client.
When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent
Substitution.
Simultaneous verification of cash and cash equivalents, such as negotiable securities, is common practice to avoid the possibility of conversion of negotiable assets to cash to conceal a cash shortage. The auditor should control and verify all liquid assets at one time.
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?
Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.
If incremental RMMs can be controlled, procedures to cover the remaining period ordinarily include (1) comparing information at the interim date with information at the balance sheet date to identify and investigate unusual amounts (e.g., new large balances) and (2) other analytical procedures or tests of details.
An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to
Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.
The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used to confirm specifically listed deposit and loan balances. Nevertheless, the standard confirmation form contains this language: “Although we do not request or expect you to conduct a comprehensive, detailed search of your records, if, during the process of completing this confirmation, additional information about other deposit and loan accounts we may have with you comes to your attention, please include such information below.”
Tracing shipping documents to prenumbered sales invoices provides evidence that
Shipments to customers were properly invoiced.
The direction of testing to determine that shipments to customers were properly invoiced is from the shipping documents to the sales invoices.
In confirming a client’s accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year’s audit, the auditor most likely would choose
Individual invoices.
The sampling unit is an individual item included in a population. It may be a physical thing or a monetary unit. When testing accounts receivable, it is important to determine that the transactions have been recorded appropriately. Thus, the auditor should compare the transactions recorded in accounts receivable with the individual invoices.
Which of the following might be detected by an auditor’s review of the client’s sales cutoff?
Inflated sales for the year.
Sales cutoff tests are designed to detect the client’s manipulation of sales. By examining recorded sales for several days before and after the balance sheet date and comparing them with sales invoices and shipping documents, the auditor may detect the recording of a sale in a period other than that in which title passed.
When auditing a client’s statement of cash flows, an auditor will rely primarily upon
Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.
The statement of cash flows represents balances taken from the other statements as well as analysis of changes in those balances. Consequently, this statement is audited in conjunction with the balance sheet and income statement accounts.
A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA’s best direction of test is from the
Meter department records to the billing (sales) register.
The best direction of testing is to proceed from the meter department records, which indicate those customers who have received service, to the billing (sales) register. Comparing services rendered with billings is the best way to detect omitted billings.
An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
Dates checks are deposited per bank statements with the dates remittance credits are recorded.
Lapping involves recording current cash payments on accounts receivable as credits to prior customers’ accounts to conceal a theft of cash. Comparing the date that a customer’s check was deposited with the date a record was made to reduce the balance determines whether the deposit was made prior to the recording date.
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
Inspect the shipping records documenting the merchandise sold to the debtors.
When customers fail to answer a second request for a positive confirmation, the accounts may be in dispute, uncollectible, or fictitious. The auditor should then apply alternative procedures (examination of subsequent cash receipts, shipping documents, and other client documentation of existence) to obtain evidence about the validity of nonresponding accounts.
