Ch 11: auditing the revenue process Flashcards
what are the five steps to auditing revenues
step 1: initial audit planning
step 2: understand internal controls and determine preliminary audit strategy
step 3: test controls based on preliminary audit strategy
step 4: determine and perform substantive procedures
step 5: draw conclusion about fair presentation
what are the three classes of transactions in the revenue process
1, credit sales
2. collecting cash receipts (receivables and cash sales)
3. recording sales adjustments
what are some examples of sales adjustmnets
sales returns and allowances, provision for bad debts, write-off of bad debts
if revenue is recognized prematurely, both sales and AR will be ________
overstated
if cash receipts are understated, AR will be __________
overstated
transactions providing for bad debts and the write-off of bad debts often occur during _________ or ___________ adjustments
month-end or quarter-end
What are two major transaction classes with significant volumes of transactions in the revenue process
credit sales and cash receipts
if cash receipts are understated, accounts receivable will be _________
overstated
What is steps 4 of the revenue audit process
performing substantive procedures
Can analytical procedures be used as substantive procedures to gather evidence in support of assertions related to account balances or transactions?
Yes
Are analytical procedures required to be used as substantive procedures?
no
if analytical procedures are used as substantive procedures during risk response auditors use data through the client’s ____________
third quarter or YE
test of details of transactions may be performed during _______
interim alongside test of controls or seperately
Tracing sales transaction the auditor should start with a sample ____________ and trace transactions to _____________
of shipping documents; sales journal
tracing cash receipts the auditor would sample items from the ________________ and trace them forward to ___________
prelist of cash; cash receipts journal
tracing sales returns the auditor would start with _____________ and trace forward to _____________
sales returns authorization; the receiving report and the entry in accounting records
the ______ of sales returns may be a concern if management has incentives to overstate revenues and internal controls over area are weak
sales returns
sales cutoff test designed to obtain reasonable assurance that
sales and accounts receivable are recorded in the accounting period in which the transaction occurred and the corresponding entries for inventories and cost of goods sold are made in the same period
sales cutoff procedure made as of ______
balance sheet due date
the cash receipts cutoff test is designed to obtain reasonable assurance that
cash receipts are recorded in accounting period in which they are received
cash receipts test procedure relates to what assetions
existence or occurrence and completeness assertions for cash and AR
2 primary sets of procedures for tests of details balances
- confirmation of receivables and related follow-up procedures and
- procedures for evaluating the adequacy of the allowance for uncolletible accounts
confirmations should be controlled and mailed by who
auditors
confirmations are the primary source of evidence for the ________- assertion for AR
existence
confirmations of AR provide evidence that the balance is __________ although the evidence is limited
complete
anchoring bias
tendency to use initial piece of information as an anchor which subsequent information is inadequately assessed
in vouching revenue transaction what are the relevant assertions evidence is being provided for
occurrence, accuracy, classification and cutoff assertions
existence is related to IS or BS?
BS
occurrence is related to BS or IS?
IS
substantive analytical procedures verify what
auditor’s expectations of relationships (like AR to sales and gross margins)
what are the four intial procedures for AR account balance
- obtain AR trial balance
- agree BB of AR to PY working papers
- scan for unusual transactions
- agree sub ledger to general ledger
vouching of sales transactions relates to what assertion?
occurence
what is the dual purpose test
perform more than 1 procedure on a sample (test of controls and test of details)
tracing sales transactions is related to what assertion
completeness
what are the times that auditors dont have to confirm AR
AR immaterial to FS; could be ineffective
