A4 - Performing Further Procedures, Forming Conclusions, and Communications

Question 1

Positive Confirmations:

Answer 1

• States the amount of receivables owed by the customer
• Customers are requested to return a statement indicating if they agree
• Large individual accounts
• Expected errors or items in dispute
• Internal control is weak

Question 2

Negative Confirmations:

Answer 2

• Customers are requested to respond only if they disagree with stated amount
• Combined assessed level of inherent and control risk is low (RMM low)
• Large number of small accounts
• No reason to expect that recipients will ignore them

Question 3

Negative confirms are less effective that positive confirms of AR because:

Answer 3

• The auditor cannot infer that all nonrespondents have verified their account info

Question 4

Confirmation of AR rarely provides reliable evidence about completeness assertion because:

Answer 4

• Customers may not be inclined to report understatement errors in their accounts

Question 5

Two assertions for confirmations of AR provides primary evidence are:

Answer 5

• Rights & obligations-

- Existence

Question 6

Fraudulent activities in the revenue cycle due to lack of effective internal controls:

Answer 6

• Authorization of credit memos by personnel who receive cash may permit misappropriation of cash
• Cash receipts is a function of the treasurer’s department and should be separate from the AR role

Question 7

What assertion tests understatement?

Answer 7

• Completeness (trace forward from supporting documentation to the accounting records)

Question 8

What assertion tests overstatement?

Answer 8

• Existence (Trace downward from accounting record to supporting documentation)

Question 9

What audit procedure to identify fraudulently overstating revenue by recording fictitious sales?

Answer 9

• Select a sample of sales invoices and and trace to related shipping documents
• Existence Assertion

Question 10

Revenue cycle internal control to minimize failure to prepare sales invoices, auditor would select a sample of transactions from:

Answer 10

• Shipping file document

Question 11

When testing liabilities, an auditor is generally concerned about what assertion:

Answer 11

• Completeness (understatement)

Question 12

In searching for unrecorded liabilities, an auditor most likely would examine the:

Answer 12

• Receiving reports for items received before year-end, but NOT yet recorded
• Auditor should select cash disbursements made subsequent to year end and examine supporting documentation . Auditor looks for items that should have been recorded at the balance sheet date, but were not

Question 13

Appropriate segregation of duties for preparing a purchase order:

Answer 13

• Purchasing Department - preparing the purchase order
• Accounts Payable Department - responsible for matching documents
• Treasurer - responsible for making payment

Question 14

If auditor suspects employees are ordering goods for themselves without recording the purchase or receipt, and destroys all the invoices and related vouchers, what would the auditor select items from for testing?

Answer 14

• Cash disbursements (trace disbursements to related invoices. If no documentation, could be fraud)

Question 15

To provide assurance that each voucher is submitted and paid only one, an auditor should determine whether each voucher is:

Answer 15

• Stamped “paid” by the check signer

Question 16

What is a good audit procedure for identifying unrecorded trade accounts payable?

Answer 16

• Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

Question 17

Internal control procedure to test for completeness assertion of inventory:

Answer 17

• Receiving reports are prenumbered and periodically reconciled