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AUDIT - Only pass keys and problem areas > AUD 4 TRANSACTION CYCLES > Flashcards

AUD 4 TRANSACTION CYCLES Flashcards

1
Q

What is the description or parts of the revenue cycle?

A

Sales revenue, receivables, and cash receipts

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2
Q

What is part of the expenditure cycles?

A

Purchases

Payables

Cash disbursements

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3
Q

Whats part of the inventory cycle?

A

Perpectual inventory

physical counts

manufacturing costs

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4
Q

What part of the investments cycle?

A

investments in debt and equity and the income received from investments

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5
Q

Whats included in the PP&E cycle?

A

acquisitions and disposals and related depreciation expense

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6
Q

Whats included in the payroll and personnel cycle?

A

payroll and personnel functions

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7
Q

Whats included in the financing cycle?

A

debt and equity financing

repayments to borrowers

interest expense

dividends

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8
Q

How to test the completeness assertion on the A/R balance

A

Trace aged TB of AR to GL control account

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9
Q

AGED TRIAL BALANCE Definition

A

AGED TRIAL BALANCE alphabetically lists accounts receivable with outstanding balances. It displays one balance for every account by age and is typically produced only once on demand to check receivable details against other reports.

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10
Q

How to test valuation, allocation, and accuracy assertion for the AR balance

A

Accuracy = confirmations

adequacy of AFDA = valuation

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11
Q

How to test existence/orccurrence assertions for the AR balance

A

confirm sample of AR

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12
Q

How to test the rights/obligations assertion for AR balance

A

Review bank confirms and debt agreements for liens on receivable. Review board minutes for factored/sold AR

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13
Q

How to test completeness assertion for sales transactions

A

trace shipping docs to invoices, and to the sales journal and AR sub ledger

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14
Q

How to test cutoff assertion for sales transactions

A

Analyze record of sales returns after YE.

Compare some invoice from shortly before and after YE w/shipment dates and w/the dates the sales were recorded in the sales journal

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15
Q

How to test Val/Alloc/Accuracy assertion for sales transactions

A

Compare prices/terms on invoices w/authorized price liests and terms to see if sales are recorded at correct amount

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16
Q

How to test Exist/Occur assertion for sales transactions

A

Vouch sales trans from sales journal to invoices and back to customer order and shipping docs

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17
Q

How to test understandability and classification of sales transactions

A

examine invoice for proper classification of correct revenue accounts

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18
Q

How to test the completeness assertion of disclosures/presentation assertion. Which disclosures are supposed to be included in the FS?

A
  1. Revrec method
  2. Rev by reportable segment
  3. Related party revenue and receivables
  4. Receivables by type and term (short vs long)
  5. Pledged or discounted receivables
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19
Q

How to test the val/all/acc assertion for disclosures/pres of sales?

A

Read footnotes and other info related to AR and sales accurate and at correct amounts

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20
Q

How to test for Rights, obligations, occurrence for disclosure/presentation of AR/Sales

A

Determine if any AR pledged, assigned or discounted.

Compare disclosures to other aud evidence to ensure all disclosed info has actually occurred

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21
Q

What are A/P dept’s 3 functions?

A
  1. record payable
  2. approve invoice for pmt
  3. record pmt after its paid by treasurer
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22
Q

What are some of the things the treasurer does?

A

Prepares/signs/mails checks and cancels all supporting docs after pmt.

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23
Q

How to test completeness assertion for balance of A/P:

A
  1. agree a/p listing to the GL
  2. get sample of vendor statements and agree to the vendor accts
  3. Perform a search of unrecorded liabilities
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24
Q

How to test the val/all/accur assertion for A/P balance

A
  1. get A/P listing and foot it and agree to the GL
  2. get sample of vendor statements and agree the amounts to the vendor accounts
  3. Review results of A/P confirms
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25
Q

How to test the exist/occur assertion for the A/P bal

A

vouch selected amt from the A/P listing to the voucher packages.

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26
Q

When would A/P confirms be sent out? Would usually be vendors with small/zero balances selected

A

When IC is weak

Disputed amounts

monthly vendor statements aren’t available

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27
Q

How does auditor test the rights and obligations assertion of the A/P balance?

A

review sample of voucher packages for PR, PO, receiving report and invoice to verify payable owed by entity

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28
Q

How to test completeness for purchase trans

A

trace sample of vouchers to purchase journal

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29
Q

How to test val/all/accur for purchase trans

A

recompute math of sample of invoices

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30
Q

What are the required disclosures for AP and purchases in the notes to the FS

A
  1. payables by type
  2. purchase contracts and purc. commitments
  3. Related party purch and payables
  4. expenses by segment
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31
Q

What is the test for the val/alloc/accur assertion for disclosures of purchases/AP

A

Read footnoes and info to see if info is accur and presented at approp. amounts

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32
Q

Whats the test for the rights/obs/occur of purch/AP?

A

Compare discl. to other aud evid to ensure all disclosed info related to AP/Purch has occured

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33
Q

Whats the test for ustandability and classification of AP/Purchases

A

read all AP and purchase related disc. to see if they are understandable. Aud s/see if mat LT payables or non-trade payable require separate disclosure

34
Q

NEED TO LOOKUP AND REFRESH HOW TO VALUE AND RECORD FLUCTUATING INVESTMENTS/INTENGIBLE ASSETS

A

NEED TO LOOKUP AND REFRESH HOW TO VALUE AND RECORD FLUCTUATING INVESTMENTS/INTENGIBLE ASSETS LIKE AFS AND HTM AND FMARKET (rEVALUATION OF PPANDE

35
Q

What cash fraud scheme is this? : withholding and not recording current receipts of cash or checks and the unrecorded receipts is covered by applying a later cash receipt to the previously unrecorded account

A

Lapping

36
Q

Which fraud scheme?
check is drawn on one bank and is deposited in another bank and no record is made of the disbursement in the balance of the first bank

A

Kiting

37
Q

Which scheme uses a bank transfer schedule and what is that?

A

Kiting
BTS = compares the dates checks are drawn at the disbursing bank to the dates the checks are deposited in the receiving bank account

38
Q

What are the primary audit procedures to test completeness, valuation/allocation, and existence of the ending cash balance?

A

Bank confirmations and audit of YE bank reconciliation

39
Q

The steps/procedures in testing the YE bank reconciliation in the audit of cash balance

A
  1. footing bank recon and list of outstanding checks
  2. agree bal per book to the GL
    3.agree bal per bank confirm to bal of bank acct on recon
    agree deposits in transit and outstanding checks to cutoff bank statement
40
Q

Whats the cutoff bank statement?

A

Obtained from bank and covers the first 10 to 15 days of the new period after YE. Any reconciling items s/usually clear during this 10-15 day period so if something hasn’t cleared it s/be investigated

41
Q

What procedures performed to audit cash receipts and disbursement transactions for completeness

A

CR: Trace a sample of remit advices to cash receipts journal and deposit slips

CD: trace sample of cancelled checks to CD journal

42
Q

What are the required disclosures in the FS for cash? (tests completeness of disclosures)

A
  1. Policy defining cash/cash equiv.
  2. Restrictions on cash, including sinking fund requriements
  3. Compensating balance requirements
43
Q

What is a sinking fund requirement?

A

A requirement for certain bond issuers to buy back a portion of its debt at regular intervals

44
Q

Who reviews and approves writeoffs of A/R?

A

Treasurer.

Note: the credit department initiates the writeoff request

45
Q

In the collection of cash receipts cycle, who prepares the listing of checks? and who prepares the check deposit summary

A

Mailroom does check listing

cashier does the check deposit summary

46
Q

What are the dual-purpose tests performed at thfor the physical inventory count to audit the ending inventory balance

A

Inventory observation:

  1. inspect inventory for existence and condition
  2. perform test counts
  3. eval mgt’s instructions/procedures for inventory count
  4. observe performance of count procedures
47
Q

How does auditor test completeness of inventory during observation?

A

Trace test counts to the inventory report and trace sample of prenumbered inventory tags to the physical inventory report

48
Q

How to test val/alloc/accuracy of inventory?

A
  1. test math accuracy of inventory report and recon to GL inventory
  2. inquire (and look for) ab obsolete or damaged goods, scan perpetual records for slow-moving items
  3. Examine vendor invoices
  4. Perform inventory price tests to check valuation of inventory
49
Q

How does auditor test existence of inventory of items on physical inventory report?

A

vouching smaple of items in physical inventory report by performing tests counts, and by vouching to inventory tags.

50
Q

Which are the required disclosures for inventory that s/be included in the notes to the FS? (completeness)

A
  1. cost and valuation method (cost = LIFO, valuation = NRV or LCM)
  2. RM, WIP, FG bals
  3. consigned inventory
  4. pledged or assigned inventory
  5. sig. lossess from w/downs or purchase commits
  6. warranty obligations
51
Q

Where/how do you record unrealized gains/lossess on AFS securities?

A

OCI

52
Q

Where/how do you record unrealized gains/lossess on trading securities?

A

Earnings

53
Q

What are some of the typical categories/classifications of debt/equity investments?

A 
Trading
AFS
held to maturity securities
Derivatives
Equity method
54
Q

Which disclosures s/the auditor ensure have been made in the FS notes related to investments?

A

Auditor s/determine if all required marketable securities and derivative disclosures have been made

55
Q

How should maretable securities (AFS, HTM, TS) be recorded

A

No sig. influence:
Trading and AFS are recorded at fair value
held to maturity are carried at amortized cost

56
Q

How should the auditor audit the classification of equity method investments?

A

Examine audited FS of the investee.

And s/inquire of mgt regarding the entity’s ability to exercise significant influence over the investments.

57
Q

When a client’s investments in a security that’s valuation is based on the investee’s financial results, what are the procedures the auditor s/perform to obtain SAAE in support of the investee’s financial results?

A
  1. Obtain and read the FS and audit report of the investee
  2. if investee hasnt been audited, request the FS be audited
  3. if carrying amount of investment in client’s FS reflect factors not in the investee’s FS, or FVs are materially different from investee’s carrying amounts, aud s/get SAAE to support the amounts.
  4. If theres a difference in periods that may have a material affect, see if mgt has considered the lack of comparability and determine the effect if any on the auditor’s report.
58
Q

What should the auditor do when auditing investments in derivatives and other securities measure or disclosed at fair value?

A
  1. Determine if applicable fwork specifies the method that s/be used to detmine fair value
  2. evaluate if the client’s determined fair value is consistent with the specific valuation method
  3. if fair value estimate is obtained from broker-dealer or 3rd party, get an understanding of the method used by them to develop their fair value estimate
59
Q

What does PP&E assets include?

A

This includes all tangible assets w/service lives greater than one year that are used in operation of the business.

60
Q

What are the major transactions associated w/the PP&E assets/cycle?

A

Purchases, repair and maintenance, depreciation, disposal, revaluation, and leasing.

Revaluation of PP&E is only used for IFRS

61
Q

Why does the auditor review the repairs and maintenance account when auditing PP&E?

A

To see if they locate any items that s/have been capitalized

62
Q

What are the required disclosures related to fixed assets that are to be included in the FS?

A
  1. Depreciation method and useful lives
  2. Depreciation expense for the period.
  3. Balance of each class of capital assets by nature or function
  4. A/Dep allowance by class or in total.
  5. Liens and mortgages
  6. capital/operating lease information
63
Q

What are the SODs related to the Payroll Cycle?

A
  1. Authorization to employ and pay (HR)
  2. Supervision approves hours
  3. Timekeeping and cost acctg - accumulated separate
  4. payroll check prep
  5. check distribution
64
Q

What are the required disclosures related to the payroll cycle in the notes to the FS?

A
  1. pension and post-retirement benefit disclsoures
  2. stock-based compensation disc.
  3. deferred compensation and profit sharing plans
65
Q

Which of the assertion(s) when auditing disclosures in all cycles seems to include:

“read the footnoes and other information related to …to determine if the information is…

A

Val/alloc/accuracy

66
Q

What does the financing cycle include?

A

– includes an entity’s debt and equity

67
Q

What should good IC over debt include?

A
  1. adeq. documentation of all financing agreements
  2. new debt financing authorized by BOD/mgt
  3. detailed records of LT debt, including interest and principal pmts, and amortization of bond premiums/discounts
68
Q

What is good IC over equity?

A

-all stock issuance, D/E declarations, and Tstock must be authorized by the BOD.

69
Q

What are the IC that a company s/implement if a stock transfer agent is not used?

A
  • officer of entity s/be responsible for ensuring that the stock transaction comply with AOI and regs and he s/maintain the stock cert book. This person s/have no acctg responsibilities
  • There s/be periodic independent recon of the stock cert boko w/the number of shares outstanding
70
Q

In auditing debt transactions, which assertion is being tested when the auditor examines lease agreements for proper classification as operating or capital?

A

Completeness

71
Q

How is classification assertion tested when auditing the transactions for debt?

A

By making sure LT and ST debt are properly categorized as such. Done by looking at due dates

72
Q

How is the valu/alloc/accur assertion tested when auditing the transactions for debt?

A

Compare interest expense to the debt balance

73
Q

How is existence and occurrence tested when audited the transactions of debt?

A

verify existence of new debt by reviewing the BOD mins for evid and inspecting the agreements

74
Q

What are the required disclosures related to debt transactions

A
  1. Details of maturity dates, interest rates, call/conversion privleges, and assets pledged as collateral
  2. future sinking fund payments and maturities for each of the next five years
  3. loan covenants
75
Q

Which assertions is the auditor concerned about when auditing equity?

A

completeness, valuation, existence/occurrence. Aud s/also focus on evaluating classification/ustandability

76
Q

What are the required FS notes related to equity?

A
  1. Number of shraes authorized/issued/outstanding
  2. Rights and privileges of securities, including D/E and liquidation preferences, participation rights, call prices/dates, conversion or exercise prices or rates and dates, sinking fund requriements, unusual voting rights and sig. contracts to issue additional shares
  3. stock option plans
  4. appropriations or R/E earning and restrictions on D/Es.
77
Q

How is existence/occurrence assertion tested for auditing of stock trans?

A

can be tested by vouching trans recorded during period to BOD minutes.

Also stock agent confirmation and inspection of stock cert book

78
Q

What do the substantive test of details in the inventory cycle primarily focus on?

A

Ending balance in the investment account and the presentation and disclosure.

79
Q

When using blank positive confirmations w/be preferrable

A

Blank confirmations should be used if recipients are likely to sign confirmations without careful investigation. Blank confirmations require the recipient to fill in the balance, so the recipient cannot simply sign off without checking the balance.

80
Q

When an auditor is searching for unrecorded payables/liabilities, he would:

A

An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not.

AUDIT - Only pass keys and problem areas (20 decks)

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