Ch 13: auditing cash and inventory Flashcards
what are the initial procedures for cash balance? (hint: there’s 5)
- agree beginning balance to prior year working papers
- obtain cash trial balances/ schedules
- scan for unusual items
- check mathematical accuracy
- agree subsidiary ledger to general ledger
are substantive analytical procedures used when auditing cash and inventory?
not as often- they may not be meaningful for cash as cash balances may be difficult to predict due
cutoff testing is related to what kind of test
test of details of transactions
what is it called when auditors while auditing cash and inventory inspect last checks written at year end to cash disbursements journal?
cutoff testing
what is it called when auditors while auditing cash and inventory inspect last deposits made at year-end to cash receipts journal
cutoff testing
what does cutoff testing do when auditing cash and inventory?
ensure client records recorded in the proper period
under the test of details of transaction, the bank transfer schedule is used to detect what?
kiting
There is a ___________ risk of kiting with worse internal controls
higher
confirming cash balances falls under what test of details when auditing cash and inventory
test of details of balances
re performance when auditing cash and inventory falls under which test of details
test of details of balances
confirming cash balances tests what relevant assertions
- existence
- completeness
- valuation
when confirming cash balances do you confirm the accounts with balances of 0?
yes- ALL account balances
confirms for cash balances are in a _________ from and from ____________
written- third party
what is being reperformed in the test of details of balances
year-end bank reconciliation
what do auditor’s obtain in the test of details of balances?
partial cutoff bank statement
what is the test of details for correct classifications on balance sheet and note disclosures
test of details of presentation and disclosure
how is a bond sinking fund classified on the financial statements
long-term asset
how are restrictions in cash put on the financial statements
listed separately on balance sheet and discloses im the notes
how are lines of credit put in the financial statements
described in the notes; any balance/ amount used is classified as a liability
how is a bank draft accounted classified in the financial statements
current liability
when planning the audit it is important for the auditor to:
- understand ______________
- understand _______________
- evaluate the ______________________
- understand the account
- understand the entity and its environment
- evaluate the results of analytical procedures performed during planning
what are examples (3) of cash and cash equivalents
cash in bank, imprest bank accounts, cash equivalents
commercial paper, treasury bills, and money market funds are examples of what
cash equivalents
what is the excess of cash flow from operations over capital expenditures
free cash flow
top performers in the country generate significant ___________
free cash flow
its important for the auditor to understand how management ________ and manages __________ and to tailor the audit of cash accordingly
budgets; cash balances
effective analytical procedures involve comparing cash balances with ____________ or with _____________________
forecasts or budgets; company policies regarding minimum cash balances and the investment of surplus cash
when internal controls over the budgeting process are strong, it is usually most effective to compare cash balances with ____________
budgets and company policies
there are significant inherent risks surrounding _________ and __________
cash receipts; disbursement transaction
many schemes for stealing cash involve failing to record ________
cash receipts
misappropriating assets during the period results in issues with which assertion
completeness
inherent risks pertaining to rights and obligations and accuracy, valuation and allocation assertions for cash are usually _________
low bc no complexities involving rights, accounting measurements and estimates.
the effectiveness of bank reconciliations depends on the adequacy of ____________
segregation of duties
in companies with good segregation of duties, bank recs will also be tested at _______
interim
if duties are not adequately segregated, auditor will follow a primarily ___________ approach
substantive
if internal controls over cash receipts and disbursements appear to be effective they should be tested when?
at interim
fraud risk is increased when control risk is ________
high
the most important control over the existence completeness and accuracy and valuation of cash balances is ________________
an independent bank reconciliation
if control risk is high the auditor should assume that fraud risk is _________
high
when fraud risk is high, its important for the auditor to design _____________
substantive procedures
test of cash balances focus on the assertions of:
- existence
- completeness
- rights and obligations
- accuracy, valuation and allocation
what is the float period
when checks are written to transfer funds between accounts at different banks several days generally will elapse before the check clears the bank on which it’s drawn
what is kiting
a method often used to conceal a cash shortage or to overstate cash; involves recording a transfer between bank accounts as a deposit while failing to record the cash disbursement in the same time period
journal entires are not made based on when the check actually arrives but rather based on the ______________
economic event
test of details of balances primarily on 2 major tests
(1) sending a bank confirmation and (2) testing the client’s bank reconciliation
bank confirms test which relevant assertions
- existence
- completeness
- accuracy, valuation and allocation assertions
when the acceptable level of detection risk is high, the auditor may scan the client-prepared bank reconciliation and verify the ________________ of the rec
mathematical accuracy
what is a cutoff bank statement
a bank statement for the period subsequent tot he date of the balance sheet that the client requests to send directly to the auditor
deposits in transit on the bank rec can be vouched to _______________
deposits on the cutoff statement
if the financial statements show a trend of increased profit margin combined with an increase int eh number of inventory turnover in days, inventory may be ____________
overstated
a lengthening of inventory turnover days may indicate __________ or ______________ problems
existence; valuation
cutoff problems can result in ________ inventory, __________ cost of goods sold and __________ gross margins
overstating; understating; overstating
what is a cycle count
client frequently identifies small portions of items in perpetual inventory and count that on a rotating basis
what is the three step process to determing the value of ending inventory
- client determines inventory quantities at each location
- compilation of inventory values is developed
- JE prepared to adjust the value of ending inventory and COGs based on physical count and compilation of inventory values
observation of inventories is required when inventories are ____________ to a company’s financial statements
material
the observation of counting inventories once and only once is related to which assertion
existence
making test counts and tracing quantities to final counts is related to which assetion
completeness
the auditor recording the last receiving and shipping documents used and determining goods received during the count is related to which assertion
cutoff
