A4, M1-M5 Flashcards
What does records refer to?
- JE
- subsidy ledger
- general ledger
- trial balance
- financial statements
What are the three accounts related to the revenue cycle?
- Cash
- Accounts Receivable
- Revenue or Sales
What presumption must be made in every audit related to revenye?
There is a risk of MM due to revenue recognition fraud.
What control should be in place for sales order documents in a company?
They should be prenumbered and in a serial order, in order to detect when a sales order is missing or duplicated.
What control should be in place when selling on credit?
A credit department should have authority to approve the transaction to sell on credit.
What document does the shipping department produce?
bill of lading
What is a bill of lading?
a document betwen the seller and shipper, indicating what was shipped
The shipping department is which piece of ARC?
Custody
What two controls should be in place in a billing department (related to sales)?
- creates serially numbered sales invoice
- matches shipping document, sales order, and sales invoice
What is the three-way match for the revenue cycle?
- sales order
- shipping document (bill of lading)
- sales invoice
The billing department is which piece of ARC?
Record-Keeping
Can the billing and accounting department be consolidated?
Yes.
What does the A/R department do in terms of revenues?
- Eliminate receivable when cash is received.
- Prepare aging schedule for AR.
Who does the A/R department send the aging schedule to?
the credit department
What is used as a sales return slip?
serially numbered receiving report
What two functions/duties must be separated in sales returns?
- Custody: Collection (Payment/Asset)
- Record-Keeping: Creates Credit Memo for Return
What four parties are in play for cash receipts controls?
- Mailroom
- Cashier
- Accounts Receivable Department
- Accounting Department
What happens in the mailroom (3)?
- incoming mail is opened by someone without access to AR subledger
- cash receipt listing is created
- copy of cash receipt listing is given to three parties: cashier, AR dept, accounting dept
Who does the remittance advice go to?
A/R
Who does the check go to?
the cashier
What does the cashier do?
- Receives the actual receipts.
- Prepares the bank deposit slip.
What does the AR department do?
- Must match the details from the bank deposit slip with details from customer remittance advices.
- Enter receipts into AR subledger.
What does the accounting department do?
- Match the check listing from cashier, deposit slip summary, and CR summary from the A/R department.
- Enter receipts into the accounts receivable control account.
What is a control account?
a type of general ledger account
Who approves write-offs of A/R?
the treasurer
What is a lockbox?
- Customer sends money directly to the bank.
- Bank deposits the money into the company’s account.
- Bank sends copies of the checks to the client.
What is the main purpose of a lockbox?
to reduce diversion of cash receipts
Is a sales invoice a record or source doument?
record
What procedure would most likely be done for the completeness assertion for sales?
Trace shipping documents to the corresponding sales invoices and then to the sales journal
What procedure would most likely be done for the cutoff assertion for sales?
Compare invoices just before and after year end with their shipment dates + shipment terms + date that sale was recorded
If an item is shipped FOB shipping point after year end, should it be excluded or included in Year 1’s sales?
Excluded, because not shipped until the next year.
What procedure would most likely be done for the valuation/allocation/accuracy assertion for sales?
Compare prices on invoices with authorized price lists.
What procedure would most likely be done for the existence/occurence assertion for sales?
Vouch sales transactions from the sales journal to the customer order and shipping documents.
What procedure would most likely be done for the rights/obligations assertion for sales?
N/A, rights and obligations is not a relevant assertion for IS accounts.
What procedure would most likely be done for the understandabulity of presentation and classification assertion for sales?
Examine invoices for proper classification.
What procedure would most likely be done for the completeness assertion for A/R?
Trace the total from A/R aging to the general ledger.
What procedure would most likely be done for the cutoff assertion for A/R?
N/A, this is not a relevant assertion for BS accounts.
What procedure would most likely be done for the valuation assertion for A/R?
Test the adequacy of the allowance for credit losses (recalculation).
What procedure would most likely be done for the existence/occurence assertion for A/R?
Confirm a sample of A/R.
What procedure would most likely be done for the rights/obligations assertion for A/R?
Review bank confirmations, inspect debt agreements, and read board minutes for evidence that accounts receivable have no liens or have not been factored/sold.
When are A/R confirmations NOT required (3 OR criteria)?
(1) receivables are immaterial, OR
(2) confirmation would be ineffective, OR
(3) inherent risk and control risk are very low, and other procedures provide evidence sufficient to reduce audit risk to an acceptably low level
Who sends a confirmation letter, the client or the auditor?
the auditor
When are blank confirmations typically used?
when recipients sign positive confirmations without careful investigation
What is the biggest benefit of blank confirmations?
provides greater degree of assurance
What are the two drawbacks of blank confirmations?
- requires greater effort by the recipient
- has lower response rate
Blank confirmations are a type of _______ confirmation.
positive
Confirmations can provide evidence for what two assertions?
- Existence
- Rights and Obligations
Confirmations CANNOT provide evidence for what two assertions?
- Valuation
- Completeness
What three scenarios give rise to using negative confirmations?
(1) RMM is low.
(2) Large number of small account balances are being confirmed.
(3) There is no reason to expect that recipients of the request will ignore them.
If a response is not received to a confirmation (even after multiple follow up requests), what should the auditor do?
perform alternative procedures
Which documents are not persuastive enough to prove existence of A/R?
sales order or purchase order
Which alternative procedures are apprpriate for A/R existence?
verify payment after year end, inspect shipping documents
Which accounts are involved in the expenditure cycle?
- expense
- cash
- accounts payable
What is the first document in the expenditure cycle?
purchase requisition
What is a purchase requisition?
a request to purchase something
What two qualities should a purchase requisition have (controls)?
- prenumbered
- approved
T/F: A purchase requisition is approved by someone in the purchase orders department.
False. The purchase requisition is approved by someone higher above the requestor.
What is the second document in the expenditure cycle?
purchase order
What happens in order to create a purchase order, starting from when the purchase requisition is approved?
- PR approved
- Approved PR is sent to the purchasing department.
- Purchasing department requests bids from various suppliers.
- Purchase order is created.
What should be true of the purchase order document?
It is pre-numbered.
What is the third document in the expenditures cycle?
Recieving Report
What is done with the purchase order after it is created?
It is sent to the receiving department, with the quantities ommitted.
Why do the quantities need to be ommitted from the PO when it is given to the receiving department?
It forces the receiving department to count the goods received, instead of simply saying the amount is correct without counting.
What should be true of the receiving report (control)?
pre-numbered
The receiving department is associated with which component of ARC?
custody
Who does the invoice get sent to?
the accounts payable department
What key control does the AP department perform?
A four-way match between the…
(1) invoice received from the vendor
(2) purchase order
(3) receiving report
(4) requisition
What does the Accounts Payable department do after the four-way match?
Create the voucher packet, and obtain approval for payment (by someone higher up in AP).
T/F: The purchase order alone is persuasive that a liability should be recorded.
False. The liability recording would depend of the terms of the agreement (FOB shipping or destination) and whether the item was actually received.
What component of ARC is the accounts payable department associated with?
record-keeping
Who does the voucher packet get sent to after it is approved for payment?
Treasurer
What does the treasurer do after receiving the voucher package?
- Prepare the check
- Sign the check
- Mail the check
What key control(s) does the Treasurer need to perform in regards to the voucher package?
- Cancel all supporting documents after payment
- Return paid vouchers to AP
T/F: Only the treasurer can prepare the check for payment.
False. AP can also prepare the check for payment, but the treasuer MUST sign the check.
A check is not considered cash until it is …
signed.
Why does the treasurer need to cancel all supporting documents after payment?
to ensure that the voucher is only paid once
What does it look like to “cancel” the documents?
stamp them “paid” on the voucher cover sheet
What does the accounting department do with the cancelled voucher?
Use that as proof to record the JE that the invoice was paid.
What does the receiving department do after they receive the goods and fill out the receiving report?
Send the goods to the department that requisitioned them.
What must the requisitioner do when the goods are received from the receiving department?
(1) inspect the goods and (2) sign the receiving report when thehy are received
Who receives the original purchase order form? Who receives a copy?
Original: Vendor
Blind Copy: Receiving Department
Copy: Accounts Payable
Who receives the original receiving report? Who receives a copy?
Original: Accounts Payable
Copy: Purchasing
What other control does the Accounts Payable department do in addition to the four-way match?
check the mathematical accuracy and approvals on all the forms
What three data entry items does the Accounts Payable department need to do?
- Prepare Purchase Journal (JE)
- Update A/P Master File
- Daily Purchase Summary
What reconciliation does the A/P department perform daily?
(1) daily purchase summary totals are reconciled with daily entries to the purchase journal
What does the accounting department do?
(1) Receive purchase summary from AP.
(2) Post to GL.
Does the A/P department record any journal entries on their own?
No, only the accounting department does this.
What reconciliation does the accounting department do in regards to the GL?
GL reconciled with A/P Master File
What reconciliation does the accounting department do in regards to the vendor’s monthly statements?
Vendor’s Monthly Statements are reconciled with the A/P Master File
What component of ARC is the accounting department associated with?
Record Keeping
What component of ARC is the requisitioning department associated with?
authorization
What component of ARC is the purchasing department associated with?
authorization
Which department prints the cash disbursements journal?
Accounts Payable
Who creates the check summary? Who is it sent to?
Creates: the treasurer
Sent To: A/P and Accounting
Which department receives the check summary from the treasurer for data entry?
accounts payable
What component of ARC is the treasurer associated with?
custody (of cash)
What department performs the periodic bank reconciliation?
accounting
What department performs independent checks of totals per check summary and amounts journalized/posted?
accounting
The term “listing” indicates a (source/record).
record
The term “ledger” indicates a (source/record).
record
What two procedures should the auditor perform to test for completeness of accounts payable?
- Trace (agree) the accounts payabe listing to the general ledger.
- Search for Unrecorded Liabilities
How should the auditor search for unrecorded liabilities?
Select cash disbursements subsequent to year-end and trace to (examine) supporting documentation to ensure they are recorded as year-end liabilities (if appropriate).
Why should the auditor not look at payments before year-end to search for unrecorded liabilities?
The liability would no longer need to be recorded because it was paid.
What two procedures should the auditor perform to test for valuation/allocation/accuracy of accounts payable?
- Recompute the mathematical accuracy of a smaple of vendor invoices.
- Obtain the accounts payable listing, foot the listing, and agee to the GL.
What procedure should the auditor perform to test for cutoff of accounts payable?
N/A, not a relevant asserion to Balance Sheet accounts.
Is the voucher package a source or record?
source document
What two procedures should the auditor perform to test for existence/occurence of accounts payable?
- Vouch from the accounts payable listing to the Voucher Package.
- Confirmations
When confirmations are sent, are they sent to vendors with small or high balances?
small or zero balances
When are accounts payable confirmations sent (3)?
- System of controls is weak
- Disputed amounts
- Monthly vendor statements are not available
Why are accounts payable confirmations typically not sent (2)?
- There is strong evidence to support AP through other tests.
- Evidence of unrecorded liabilities is available in other ways, such as when vendors stop delivering goods.
What procedure should the auditor perform to test for rights/obligations of accounts payable?
The auditor should review a sample of voucher packages for the presence of all reports (PR, PO, RR, and Invoice) to verify that the AP is actually owed.
What two procedures should the auditor perform to test for understantability of accounts payable?
(1) Verify purchases are appropriately classified, and (2) read disclosures.
What are the most common fraud schemes related to cash?
lapping and kiting
What is lapping?
an employee steals funds received for a customer (for personal use) and uses later receipts to cover up the prior funds
How can lapping be caught (detected)?
Compare the dollar amounts and dates on deposit slips with accounts receivable credits.
What is kiting?
When you send money from one bank to another, but the disbursement from the sending bank is not recorded until AFTER year end.
What does kiting ultimately result in?
Cash is simultaneously reflected in two different bank accounts at year end.
What documentation should be produced to detect kiting?
bank transfer schedule for bank-to-bank transfers near year end
What indicates kiting in a bank transfer schedule (2)?
(1) Receiving Bank’s books or bank balance shows receipt BEFORE year end, AND
(2) Disbursing Bank’s book balance shows disbursement AFTER year end.
What is a bank confirmation?
a document from a bank that verifies a customer’s account balance, loans, or credit
Which banks should an auditor send bank confirmation requests to?
all banks that the client has done business with during the year
Should a bank confirmation be sent to a bank with a $0 year-end balance?
Yes.
Should a bank confirmation be sent to a bank account that is closed at year-end?
Yes.
What three assertions are tested with the combination of (1) bank confirmation and (2) year-end bank reconciliation?
- Completeness
- Valuation, Allocation, and Accuracy
- Existence
What types of information does a bank confirmation provide (5)?
- Year End Balance
- Outstanding Loans
- Guarantees
- Pledged Collateral
- Contingent Liabilities
- Discounted Notes
What is a bank cutoff statement?
a bank statement, but only for a portion of the month (15 days)
For what period is a bank cutoff statement usually obtained?
Jan 1 - Jan 15 of the year after the FY end (assuming Dec 31 year end)
What time period does a bank statement cover?
an entire month
What adjustments are made to the book balance in a bank reconciliation?
Bank collections not recorded
Interest income
NSF fees
Service fees
What adjustments are made to the bank balance in a bank reconciliation?
Deposits in transit
Outstanding checks
What two procedures are performed to test the completeness assertion for cash?
- Bank Confirmation & Bank Reconciliation
- Trace a sample of remittance advices to the cash receipts journal.”
What procedure is performed to test the cutoff assertion for cash?
Cutoff procedures on cash receipts and disbursements shortly before and after year end, for recording in the proper period.
What procedure is performed to test the valuation assertion for cash?
- Bank Confirmation & Bank Reconciliation
- Foot the remmitance advices and entries on the deposit slip, and agree to the cash receipts journal and bank statement.
What procedure is performed to test the existence assertion for cash?
- Bank Confirmation & Bank Reconciliation
- Vouch a sample of entries from the cash receipts journal to remittance advices, deposit slips, and bank statements.
What procedure is performed to test the rights assertion for cash?
N/A
What procedure is performed to test the understandability assertion for cash?
Examine a sample of remittance advices and cancelled checks for recording in the proper account.
What are the two key elements of a proper system of control for inventory?
(1) adequate safeguarding of inventory, AND
(2) proper segregation of duties
What is a required audit procedure for inventory?
observation of the beginning and ending inventory counts
How does attendance of the auditor as a physical inventory count function as a test of internal controls (2)?
- Evaluate management’s instructions and procedures for the inventory count.
- Observe the performance of management’s count procedures.
How does attendance of the auditor as a physical inventory count function as a substantive test (2)?
- Inspect the inventory to ascertain its existence and condition.
- Performing test counts of the inventory.
What should the auditor do if they are unable to be present at the inventory count?
perform alternative procedures
When is it acceptable to use alternative procedures for the inventory count observation (2 OR conditions)?
- impractical or impossible to observe physical inventory, OR
- inventory is not material
What is an example of a scenario where it would be impossible to observe physical inventory?
Doing the inventory count for medical devices, which are sterilized in boxes.
What if a company maintains a well-kept perpetual inventory system - can an auditor observe the inventory outside of the beginning and ending of the period?
Yes.
If the inventory counting is done at a date other than the date of the financial statements, what should the auditor do?
Auditor should obtain evidence on whether changes in inventory in the gap period are recorded properly.
If inventory is held off-site on consignment, what should the auditor do if the amount is significant?
Observe the inventory count
If inventory is held off-site on consignment, what should the auditor do if the amount is insignificant?
Confirmation of inventory is sufficient
What procedure is done to test completeness of inventory?
Trace inventory from the warehouse (inventory count) to the records.
What procedure is done to test cutoff of inventory?
N/A, not relevant assertion for B/S accounts.
What procedures are done to test valuation of inventory (4)?
- Test the mathematical accuracy of the inventory report, and reconcile to the GL inventory accounts.
- Inquire about and be alert for obsolete or damaged goods.
- Scan records (analytical procedure) for slow-moving items.
- Examine vendor invoices, review direct labor rates, test overhead rate computations, and examine standard cost variances analyses.
What two procedures are done to test rights/obligations of inventory?
- Ensure that consigned inventory is excluded from the physical inventory count.
- Confirm consigned goods in the hands of consignees are included in inventory balances.
What procedure is done to test understanability of inventory (3)?
- Read all inventory related disclosures to ensure they are understandable.
- Review inventory records for proper classification between raw materials, work in process, and finished goods.
- Review inventory disclosures to ensure proper disclosure of pledged or assigned inventory.
What procedure is done to test existence of inventory?
Vouch a sample of items from the inventory listing (records) to the warehouse (source).
Who should authorize the purchase or sale of investments?
the board of directors
Who should have custody of the actual investments (stock and bond certificates)?
an independent third-party custodian
What is an example of a third-party custodian?
Fidelity
Where should investments like gold (physical items) be held?
a safe deposit box
What controls should there be around accessing the safe deposit box?
You need two people (company officials) to open it.
What procedure should be performed to test the completeness of investments?
Search for unrecorded purchases of securities by examining transactions for a few days after year end.
What procedure should be performed to test the cutoff of investments?
N/A, not a relevant assertion for B/S accounts.
What procedures (4) should be performed to test the valuation of investments?
- Foot a listing of investments by category and agree total to the GL.
- Compare the assigned values (year end FV) to prices published by various sources or obtained from a third party.
- Recalculate the ending values of investments not reported at fair value.
- Determine whether any permanent impairment in the value of securities occurred.
What procedure should be performed to test the existence of investments held by third parties?
Request confirmations from the custodian of securities
What procedure should be performed to test the existence of investments held on hand?
Auditor physically examines securities in a safe deposit box.
What should the auditor get documentation of when they examine securities in a safe deposit box (2 things)?
(1) Records details of security count.
(2) Request acknowledgment by client that the securities were returned intact.
What procedures should be performed to test the rights/obligations of investments?
- Confirmation of securities
- Count of securities on hand
same as procedures for existence
What procedure should be performed to test the completeness of investment transactions (I/S)?
Analytical procedures to test the reasonableness of dividend and interest income, to ensure it has all been recorded.
What procedure should be performed to test the cutoff of investment transactions (I/S)?
Cutoff procedures to ensure that purchases, sales, and investment income were recorded in the proper period.
What procedure should be performed to test the valuation of investment transactions (I/S)?
Independent calculations to determine the validity of recorded gains/losses from security sales and of discount/premium amortization.
What procedure should be performed to test the understandability of investment transactions (I/S)?
Examine a sample of investment transactions to determine that the transactions were recorded in the proper accounts.
What procedure should be performed to test the existence of investment transactions (I/S)?
Analytical procedures to test the reasonableness of dividend and interest income (same as for completeness).
What procedure should be performed to test the rights/obligations of investment transactions (I/S)?
N/A, not a relevant assertion for I/S accounts.
When is the equity method used for investments?
significant influence, 20-50% ownership
What audit procedures should be performed for equity method investments (2)?
- Obtain and read the financial statements and audit report of the investee.
- Recalculate and compare with the equity in investee income amount recorded.
What should the auditor do if the financial statements of the equity method investee are not audited?
Request that the entity arrange for the investee to have their financials audited.
If the carrying value of the investment materially differs (FV-BV differences), what should the auditor do?
obtain sufficient appropriate evidence regarding these amounts
What should the auditor assess if the financial statement period of the entity is materially not the same as its equity method investee?
- Determine whether management has considered the lack of comparability, AND
- Determine the effect, if any, on the auditor’s report
What four words are associated with level 1 inputs?
observable, quoted, active, identical
What words are associated with level 2 inputs?
observable, similar
What word is associated with level 3 inputs?
unobservable
What is the auditor’s responsibility in regards to fair value measurements (5 items)?
- Understand the process and controls for determining fair value.
- Assess inherent and control risk.
- Evaluate whether it is in conformity with GAAP.
- Consider the need for a specialist.
- Evaluate for indicators of management bias.
The (Auditor/Management) is responsible for making fair value measurements and disclosures in accordance with GAAP.
management
If a specialist is used to evaluate fair value estimates, what must the auditor understand?
the methods used to determine fair values
If the pricing service used by an auditor has a close relationship with the entity, the evidence is (more/less) persuasive.
less
When using information from multiple pricing services, (more/less) information is needed about the particular methods and inputs used by the pricing services.
less
If fair value measurement is based on a quote from a broker or dealer, the relevance and reliability are based on (2 things)?
- whether the broker/dealer is a market maker for similar instruments
- whether the broker/dealer has a relationship with the entity
What is impairment of investments?
loss from a decline in fair value that is not temporary
What are three indicators of impairment?
- significant and prolonged decline of FV below cost
- downgraded by rating agency
- financial condition has deteriorated
T/F: The auditor does not need to send follow-ups for nonresponses to negative confirmations.
True, because no response means they agree with the balance.
How does the auditor need to receive a confirmation back from a customer? What method is NOT acceptable?
Must Receive: via mail
Not Acceptable: email, fax, etc.
What is a check digits test?
one that checks whether all numbers were entered
What assertion does a check digits test relate to?
valuation, allocation, accuracy
What does a record count do in the context of sales transactions? What assertion does it relate to?
- counts the number of sales transactions recorded in a given period
- completeness assertion
What does a limit test do (in relation to sales transactions)?
test the reasonableness of data and that the individual sales records were not outside of an expected range
What do run-to-run totals do?
the total of one processing run, plus the input from the next processing run, should equal the result from the second processing
The two documents most likely to be generated by the revenue cycle application are …
- credit memos
- sales invoices
Cutoff procedures can also be used for which assertion?
completeness
What is special about accounts receivable trial balance for amounts due from officers and employees?
These require special disclosures in the financial statements.
T/F: Accounting for unused prenumbered purchase orders and receiving reports is done in the AP department.
False.
Which department ascertains that the requisition is properly approved for price, quantity, and quality?
purchasing department
“Establish the agreement of” means the same thing as?
match
T/F: The purchasing department authorizes requisitions.
False.
Confirmations of accounts payable happen (before/after) the balance sheet date.
After, because AP is hard to predict.
When nonconforming goods are returned to a vendor, the purchasing department should send a (credit/debit) memo to the accounting department to ensure that the accounts payable balance is reduced appropriately.
Debit, because DR would decrease the AP balance.
When using confirmations to test AP, the appropriate population would be a list of vendors with whom …
the entity has previously done business.
What is the best way of preventing defalcation of cash by employees?
Lockbox system, because employees never have access to cash receipts.
Monthly bank statements should be reviewed by which group?
internal audit
Who controls the mailing of independent confirmations?
the auditor
Frequent kiting may result in a (low/high) level of deposits coupled with a (low/high) average balance.
high; low
The bank reconciliation must be agreed to the bank statement and GL as of what date?
the FY end date, usually Dec. 31
Is there a conflict of interest if the person reviewing or preparing a bank reconciliation has personal accounts with that same bank?
No.
How should the bank cutoff statement be used with the bank reconciliation?
The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement.
Receiving reports are prenumbered and periodically reconciled addresses which assertion for inventory?
completeness
What should be done in order to maintain accurate perpetual inventory records?
Periodic inventory counts should be used to adjust perpetual records.
Perpetual inventory records are periodically compared with the current cost of individual inventory items. – this relates to which assertion?
Valuation
What is an “inventory item pricing schedule”?
document or system that outlines the selling prices for each individual item within a company’s inventory
To check if inventory in transit (FOB shipping point) should be included, look at which document?
the vendor’s bill of lading
Who creates a bill of lading?
the person shipping goods
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud would be reduced if the trust company deals with which parties? Which parties should the trust company not deal with?
WITH: only the person reconciling the accounts
NOT WITH: the employees responsible for maintaining investment records
An auditor should develop an understanding of the ____ ____ of each derivative.
economic substance
Dividend income from investments is tested by referring to what external documents?
dividend record books
If the auditor is unable to count the securities at the balance sheet date, what should the auditor do?
The auditor should request the client to have the bank seal the safe deposit box until the auditor can count the securities.
By ensuring that credit approval is obtained before goods are shipped to customers, what assertion is the auditor testing?
Valuation, Allocation, and Accuracy (because they are looking at whether the amounts are collectible).
What is positive pay?
A bank compares checks presented for payment to a list of authorized checks provided by the business.
Cash collections must be endorsed and deposited by the ____ ONLY.
cashier
T/F: The client is not required to disclose a specific breakdown between pure (petty) cash on hand and investments in short-term cash equivalents (securities).
True.
Verifying that cash disbursements have been properly approved is a (substantive test/test of controls).
Test of controls
Entries should not be prepared and posted to the GL without …
proper review and approval
