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ACCT 322 > ACCT 460 Exam 2 > Flashcards

ACCT 460 Exam 2 Flashcards

1
Q

Explain the following management assertions about classes of transactions

A

Occurrence: Only made up of transactions that actually occurred during the period
Completeness : all transactions and events that should have occurred and been recorded were recorded
Authorization: all transaction and events were recorded
Accuracy: amounts and other data related to recorded transactions and events have been recorded appropriately
Cutoff: transactions were recorded in the correct period
Classification: transactions and events have been recorded in the correct location (account)

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2
Q

Explain the following management assertions about account balances

A

Existence: All asset, liability, and equity interests exist
Rights and obligations: the entity hold the rights to the assets and obligations of its liabilities

Completeness: All asset, liability, and equity accounts that should be there are

Valuation and allocation: asset, liability, and equity accounts included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

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3
Q

***How do auditors use management assertions during their examination of financial statements

A

Determine a roadmap in determining what evidence to collect regarding various transactions, account balances, and required FS disclosures. Determine what evidence based off of potential misstatements that could occur

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4
Q

Explain the association between possible misstatements, management assertions, and procedures for gathering audit evidence

A

Auditors identify high-risk types of misstatements while planning the engagement
Each type of misstatement occurs because one or more management assertions have been violated
Auditors design procedures to gather evidence for testing those high-risk assertions
Look at examples provided in Table 5-3 on page 137

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5
Q

What two factors influence the quantity of evidence auditors gather, and how do those factors influence auditor decisions about evidence

A
  1. Risk of material misstatement and 2. quality of the evidence. As the audit evidence gets more reliable and the risk decreases, we do not need as much
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6
Q

For what two reasons do auditors usually rely on evidence that is persuasive, but not convincing

A
  1. because an audit must be completed in a reasonable amount of time and at a reasonable cost
  2. Due to the nature of the evidence auditors must rely on evidence that is not perfectly reliable.
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7
Q

What five characteristics increase the reliability of evidence

A
  1. Independent source outside the Entity
  2. Effectiveness of internal control
  3. auditors direct personal knowledge
  4. documentary evidence
  5. original documents
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8
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence:
    Inspection of records or documents
A

Inspection consists of examining internal or external records or documents that are in paper form electronic form or other media. Determine reliability of records/documents Vouching documents and determining direction of testing

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9
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: inspection of tangible assets
A

Physically inspect assets ex= counting inventory

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10
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: observation
A

Watching others perform a process or procedure, helps to understand procedures and internal controls in place

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11
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: inquiry
A

Seeking information (financial or non financial) from persons inside or outside the company. Develops an understanding of the entity, its environment, and its internal controls

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12
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence:confirmation
A

Send out letters to receive a direct written response (+) or a lack or direct response (-)

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13
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence:recalculation
A

Checking the mathematical accuracy of documents or records. Can be done through recalculation of totals, footing and crossfooting, and or reconciling subsidiary ledgers to account balances

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14
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: reperformance
A

Independent execution of procedures or controls originally performed by company personnel. Ex is redoing the aging of accounts receivable

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15
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: analytical procedures
A

Risk assessment procedures to assist the auditor to better understand the business and to plan the nature, timing, and extent of audit procedures
Substantive analytical procedures: to obtain evidential matter about particular assertions related ot account balance or classes of transactions
Final Analytical procedures: are used as an overall review of the financial info in the final review stage

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16
Q
  1. Describe how auditors perform each of the following procedures for gathering evidence: scanning
A

Visual review for significant or unusual items

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17
Q
  1. Answer the following questions based on the example of substantive procedures applied to the inventory account on page 310 of your text: What does the $100,000 book value of items sampled represent?
A

Out of the total value of inventory 100k worth of inventory items

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18
Q
  1. Answer the following questions based on the example of substantive procedures applied to the inventory account on page 310 of your text: What does the $98,000 audited value of items sampled represent?
A

When the auditor added all of the validated items the got a total of of 98K or they found 2K in errors

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19
Q
  1. Answer the following questions based on the example of substantive procedures applied to the inventory account on page 310 of your text? What is the projected misstatement for the book value of the inventory account balance of $3,000,000?
A

On 100K in inventory 2K in errors or 2%. So 2% of 3M is 60K

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20
Q
  1. Answer the following question based on the example of substantive procedures applied to the inventory account on page 310 of your text:Assuming that materiality for the inventory account is $50,000, what conclusion can auditors draw from substantive auditing procedures performed on that account?
A

The account is NOT stated fairly in all material respects when 50K is material misstatement

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21
Q

Why do auditors use the monetary unit sampling method to select the transactions they will verify when they gather evidence to substantiate account balances?

A

Rather than sample a number of transactions, we sample in dollars to get conclusive evidence, Used when auditors expect few errors and little to no mistatement. Typically hits big accounts.

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22
Q

What test objective are auditors most often trying to achieve when they use sampling during substantive testing?

A

1 test the reasonableness of assertions about financial statement accounts
2 develop an estimate of some account

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23
Q
  1. Explain why auditors must define the following population characteristics when they use monetary unit sampling:
    Define the population
A

They must make sure that they are testing the right sample for the correct assertion, because sample results can only be broadcast to sample selected.

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24
Q
  1. Explain why auditors must define the following population characteristics when they use monetary unit sampling:
    Define the sampling unit
A

The individual dollar is the sampling unit. auditor sample whole account where that specific dollar resides

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25
Q
  1. Explain why auditors must define the following population characteristics when they use monetary unit sampling:
    Define a misstatement
A

The difference between monetary amount in the entity’s records and amounts supported by audit evidence. too broad or too narrow may result in inefficient or ineffective testing

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26
Q

Describe the four factors that auditors must consider when determining the sample size for monetary unit sampling?

A

Desired confidence level or acceptable risk of incorrect acceptance. Direct relationship between confidence and sample size, Increase confidence, increase work and testing done.

  1. Tolerable misstatement: maximum amount by which an account can be misstated and still be acceptable to the auditor as fairly presented Inverse relationship -margin of misstatement
  2. Expected Misstatement- dollar amount of misstatement that the auditor believes exists in the population
  3. Population Size: Populations are large and made up of dollars, direct relationship to sample size
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27
Q

What is the goal auditors attempt to accomplish when they select sample items during monetary unit sampling?

A

To get a stratified sample representative of the population

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28
Q

What causes non-sampling errors when auditors perform audit procedures on the samples they select?

A

Your sample error rate is wrong because you messed something else up

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29
Q

What is the purpose of calculating the projected misstatement during monetary unit sampling?

A

the misstatements detected in the sample must be projected to the population This combined with the allowance for sampling risk is the Upper misstatement limit

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30
Q
  1. Answer the following questions based on the Extended Example described on page 319 of your text:
    What is materiality for the account being tested?
A

125000

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31
Q
  1. Answer the following questions based on the Extended Example described on page 319 of your text:
    What does the desired confidence level of 95% mean?
A

95% of the time the result you get is accurate

32
Q
  1. Answer the following questions based on the Extended Example described on page 319 of your text:
    What conclusion can the auditor draw after learning that the upper misstatement limit is $150,621 and knowing that the tolerable misstatement is $125,000?
A

Acceptable mistatements are between 125K and $150621

33
Q

Answer the following questions based on the Extended Example described on page 319 of your text:
What four options does the auditor have in responding to these test results?

A
  1. Increase the sample size
  2. Other subtantive procedures
  3. Request that management adjust account balances
  4. If company refuses to adjust the account, the auditor can issue a qualified or adverse opinion
34
Q

In summary, identify the seven steps that auditors must perform during monetary unit sampling.

A
  1. Determine test objective
  2. Define the population characteristics
  3. Determine the Sample Size
  4. Select Sample Item
  5. Perform the Audit Procedures
  6. Calculate the projected misstatement and Upper limit on Misstatement
  7. Draw final conclusions
35
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Customer sales order

A

A)Contains details of the type and quantity of products or services ordered by the customer
B) Sales order are entered into the revenue system

36
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Credit approval form

A

A) Form used to approve credit terms for the first time

B) Determines the amount of credit and the terms of credit to be extended

37
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Open-order report

A

A) Open Order Report: all customer orders for which processing has not been completed
B) The report should be viewed daily to verify shipment and avoid fraud

38
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Shipping document

A

A)Shipping document prepared anytime goods shipped to the customer
B)One copy to customer, and one to billing used to trigger revenues

39
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Sales invoice

A

a) used to bill customers

b) triggers recognition of revenue

40
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Sales journal

A

a) subsidiary journal used to keep info about sales transactions
b) to reconcile and recalculate

41
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Customer statement

A

A) the customer statement is used to list and verify the details of each account
B) attached to this document is the remittance authorization this is used to remit payment and apply to a particular account

42
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Accounts receivable subsidiary ledger

A

A) The A/R Subsidiary ledger is used to break the A/R Account down into more detail and give specific sub accounts to each customer in order to track specific debts.
B) The firm can use this for the purposes of recalculation. That is the firm can recalculate this balance and crossfoot the ledgers

43
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Aged trial balance of accounts receivable

A

A) the aged trial balance of A/R is a breakdown of the aging of accounts
B) it is used to calculate and demonstrate visibly the likelihood of being able to collect an account

44
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Remittance advice

A

a)Remittance advice- usually attached to a statement it allows each customer to remit payment and apply towards a specific debt outstanding
B) The firm uses this to collect payment and apply the debt as desired by the customer

45
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Cash receipts journal

A

a) CRJ Is a detailed breakdown of all cash and cash equivalents received as payment by the firm
B) the CRJ is used in the bank reconciliation and can be used to demonstrate that all cash collected was applied and or deposited

46
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Credit memorandum

A

a)Credit memorandum is created in the beginning of the revenue cycle when the customer is being courted for the sale
B)This allows the firm to know the terms of credit to extend

47
Q

Describe (a) when each of the following documents and records are created during the revenue cycle at EarthWear, and (b) how the information captured by the document or record is used:
Write-off authorization

A

a) write-off authorization the amount of debt that the firm can write off as bad debt expense in the allowance for uncollectible accounts
b) Higher ups in the company use this information to determine uncollectible accounts and exact bad debts

48
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Order entry
A

a) Captures the order information in digital or paper format

b) customer sales order/ credit approval form

49
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Credit authorization
A

a) Determines the customers ability to pay for goods and services
b) uses the credit approval form/sales order form

50
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Shipping
A

a) transfer from us - to the customer

b) Shipping Documents

51
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Billing
A

a) makes sure that everything that is sold is actually billed for
B) credit memorandum/sales invoice/ remittance advice
sales journal/a/r subsidiary ledger if on account

52
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Cash receipts
A

a) Properly identify and deposit all cash collected

b) CRJ/ AR Subsidiary Ledger

53
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
Accounts receivable
A

a) assures that customer record on pmts received for monies we collected
b) Remittance advice/ a/r subsidiary ledger / credit memorandum

54
Q 
Describe the (a) purpose for and (b) documents used in the following major functions of the revenue cycle:
General ledger
A

a) Keeps track of control accounts for the acct function

B) A/R subsidiary ledger sales journal

55
Q

What four factors influence the inherent risk of misstatement?

A
  1. Industy related
  2. Complexity contentiousness of revenue
  3. difficulty of auditing transactions and account balances
  4. Misstatements detected in Prior audits
56
Q

What three steps do auditors take to set control risk when a reliance strategy has been chosen for revenue processes?

A

a

57
Q

What three factors influence the type of test auditors choose to perform on internal controls?

A

a

58
Q

Identify the management assertion violated by each of the following misstatements, and describe a control procedure that would help prevent or detect that misstatement:
Recording revenue for inventory that was not shipped

A

a

59
Q

Identify the management assertion violated by each of the following misstatements, and describe a control procedure that would help prevent or detect that misstatement:
Shipping inventory but not recording revenue

A

a

60
Q

Identify the management assertion violated by each of the following misstatements, and describe a control procedure that would help prevent or detect that misstatement:
Shipping goods to a customer with an unacceptable credit rating

A

a

61
Q

Identify the management assertion violated by each of the following misstatements, and describe a control procedure that would help prevent or detect that misstatement:
Recording revenue in the wrong accounting period

A

a

62
Q

Describe two categories of substantive procedures

A

a

63
Q

Describe a test of details that provides evidence about the following management assertions.
Occurrence for sales revenue

A

a

64
Q

Completeness for sales revenue

Describe a test of details that provides evidence about the following management assertions

A

a

65
Q

Describe how (a) an error that violates the completeness assertion for accounts receivable could occur, and (b) a test of details that could detect the error.

A

a

66
Q

Describe how (a) an error that violates the cutoff assertion for sales revenue could occur, and (b) a test of details that could detect the error.

A

a

67
Q

Describe how (a) an error that violates the existence assertion for accounts receivable could occur, and (b) a test of details that could detect the error.

A

a

68
Q

Describe how (a) an error that violates the rights and obligations assertion for accounts receivable could occur, and (b) a test of details that could detect the error.

A

a

69
Q

Describe how (a) an error that violates the valuation assertion for accounts receivable could occur, and (b) a test of details that could detect the error.

A

a

70
Q

Under what three circumstances can auditors choose not to confirm accounts receivable?

A

a

71
Q

Describe the two types of confirmation requests.

A

a

72
Q

Under what four conditions are auditors likely to use negative confirmation requests?

A

a

73
Q

What steps must auditors take when they do not receive a response for
Positive confirmations

A

a

74
Q

What steps must auditors take when they do not receive a response for
Negative confirmations

A

a

75
Q

Describe four procedures that auditors could choose to perform when positive confirmations are not returned?

A

a

76
Q

Describe how auditors evaluate the evidence they gather to form an opinion about whether accounts receivable is fairly stated.

A

a

ACCT 322 (4 decks)

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