1.14.18 Flashcards
Fact Pattern: Sales procedures that were encountered during the regular annual audit of Marvel Wholesale Distributing Company are described below.
Customer orders are received by the sales-order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is stamped on the order and returned to the sales-order department. An invoice is prepared in two copies, and the order is filed in the customer order file. The customer copy of the invoice is sent to the billing department and held in the pending file, awaiting notification that the order has been shipped. The shipping copy of the invoice is routed through the warehouse, and the shipping department has authority for the respective departments to release and ship the merchandise. Shipping department personnel pack the order and prepare a three-copy bill of lading: The original copy is mailed to the customer, the second copy is sent with the shipment, and the other is filed in sequence in the bill of lading file. The invoice shipping copy is sent to the billing department. The billing clerk matches the received shipping copy with the customer copy from the pending file. Both copies of the invoice are priced, extended, and footed. The customer copy is then mailed directly to the customer, and the shipping copy is sent to the accounts receivable clerk. The accounts receivable clerk enters the invoice data in a sales-accounts receivable journal, posts the customer’s account in the subsidiary customers’ accounts ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in sequence.
To gather audit evidence that uncollected items in Marvel Company’s customers’ accounts represented valid trade receivables, the auditor should select a sample of items from the population represented by the
Subsidiary customers’ accounts ledger.
The auditor should sample from records of open accounts receivable to determine if they represent valid assets. The open accounts receivable are maintained in the subsidiary customers’ accounts ledger. Items would be confirmed directly with the debtors.
Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to
Perform the planned auditing procedures closer to the balance sheet date.
A decrease in the acceptable level of detection risk or in the amount considered material will result in the auditor’s modifying the audit plan to obtain greater assurance from substantive testing by (1) selecting a more effective audit procedure, (2) applying procedures nearer to year-end, or (3) increasing the extent of particular tests. The reduction in materiality requires greater assurance from substantive testing.
The authority to accept incoming goods in receiving should be based on a(n)
Approved purchase order.
A receiving department should accept merchandise only if a purchase order or approval granted by the purchasing department is on hand.
Which of the following human resources department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department?
Authorizing the addition or deletion of employees from the payroll.
The payroll department is responsible for assembling payroll information (recordkeeping). The human resources department is responsible for authorizing employee transactions such as hiring, firing, and changes in pay rates and deductions. Segregating the recording and authorization functions helps prevent fraud.
For a reporting entity that has participated in related party transactions that are material, disclosure in the GAAP-based financial statements should include
The nature of the relationship and the terms and manner of settlement.
Disclosure in GAAP-based financial statements of a reporting entity that has participated in material related party transactions should include (1) the nature of the relationship; (2) a description of the transactions; (3) the dollar value of the transactions; (4) the amounts due from or to related parties; and (5) if not otherwise apparent, the terms and manner of settlement.
The following are steps in the financial statement audit process:
I. Prepare flowchart
II. Gather exhibits of all documents
III. Interview personnel
The most logical sequence of steps is
III, II, I.
AU-C 315 and AS 2110 require the auditor to obtain an understanding of internal control and to document that understanding. For example, after making inquiries (interviewing client personnel) as part of performing risk assessment procedures, the auditor might gather client documents and then prepare a flowchart reflecting the information obtained about their flow.
An auditor anticipates relying on the operating effectiveness of controls in a computerized environment. Under these circumstances, on which of the following activities would the auditor initially focus?
General controls.
Relying on controls involves (1) identifying specific controls that are suitably designed to prevent, or detect and correct, material misstatements in relevant assertions; (2) performing tests of controls; and (3) assessing the RMMs. Some computer controls relate to all computer activities (general controls), and some relate to specific tasks (application controls). Because general controls have pervasive effects, they should be tested before application controls. If the general controls are ineffective, tests of the application controls over input, processing, and output are unlikely to permit the auditor to rely on controls.
When an entity uses a trust company as custodian of its trading securities, the possibility of concealing fraud most likely will be reduced if the
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
To conceal fraud related to trading securities, collusion between those responsible for record keeping and custody is required. The possibility of collusion is reduced if no direct contact between responsible parties exists.
Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is one of the overriding principles of internal control?
Responsibility for the performance of each duty must be fixed.
Effective internal control may be obtained by decentralization of responsibilities and duties. Fixing the responsibility for each performance or duty makes it easier to trace problems to the person(s) responsible and hold them accountable for their actions.
A CPA is gaining an understanding of the internal controls for a client that sells garden products using an Internet site. Which of the following is not likely to be found on the client’s organization chart?
The sales order department.
The customer directly communicates the order via the Internet site. Thus, a sales order department is not needed to handle and process the order. Acceptance of the order, collection of payment, and scheduling of products for shipment are largely independent of human involvement.
Your objective is to determine that nonrecurring purchases, initiated by various user organizations, have been properly authorized. If all purchases are made through the purchasing department, to which of the following documents should you vouch purchases?
Purchase requisitions.
When the auditor tests for unauthorized nonrecurring purchases, (s)he should vouch purchases to the purchase requisitions. The initiating authorization by the user department is embodied in a properly authorized purchase requisition.
Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
Observe the consistency of the employee’s use of cash registers and tapes.
An assertion about completeness of transactions addresses whether all transactions that should be presented are included in the financial statements. To determine that controls are operating effectively to ensure that all cash receipts are being recorded for cash sales in a retail environment, the auditor may observe the activities of the employees. Controls should provide assurance that employees use cash registers that contain internal functions (e.g., tapes) to record all sales.
To minimize the risk that agents in the purchasing department will use their positions for personal gain, the organization should
Require competitive bidding.
The primary function of a purchasing department is to ensure the authorized acquisition of goods of a specified quality on a timely basis at an economical price. Competitive bidding procedures should reduce both costs and the likelihood that a purchasing agent will show favoritism to a vendor.
In an entity under audit, employees have the opportunity to change their time worked after their timecards have been approved. This is an example of which of the following types of deficiency?
Design.
Design is evaluated to determine whether a control can effectively prevent, or detect and correct, material misstatements. When an auditor obtains the understanding of internal control, design is considered before determining whether a control has been implemented. An improper design may be a significant deficiency or material weakness. For example, when employee timecards are approved by the timekeeping function, they should be forwarded to the payroll function. Employee access to timecards after their approval is an opportunity for fraud.
Auditing standards require that sufficient appropriate evidence be obtained by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidence required may be obtained, in part, through
Analytical procedures.
Analytical procedures are evaluations of financial information made by a study and comparison of the relationships among data. The premise is that certain relationships prevail in the absence of known conditions to the contrary. Analytical procedures may be, but are not required to be, used as substantive procedures (along with tests of details) to provide sufficient appropriate evidence about specific financial statement assertions related to account balances or classes of transactions.
