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Audit > Ch 6 And 7 Class Notes > Flashcards

Ch 6 And 7 Class Notes Flashcards

0
Q

White collar crime

A

Committed by management

Management can override controls

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1
Q

Lack of separation of duties causes…

A

Weak internal controls

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2
Q

What heightened awareness of fraud?

A

SOX

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3
Q

Fraud prevention

A

Segregation of duties

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4
Q

Collusion

A

2 people agree to rip off company

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5
Q

3 questions auditor should ask employees about code of conduct

A

1 does it exist?
2 is it enforced?
3 do you know what’s in it?

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6
Q

Job description

A

Responsibilities of position

Good internal control

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7
Q

Forced vacation

A

Example of internal control

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8
Q

What control should organization have in place going into next year?

A

Budget

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9
Q

What should you do when you receive order without a packing slip?

A

Have receiving employees count items received

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10
Q

Lapping

A

Employee steals payment and applies second payment to first

Account

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11
Q

Where does the auditor trace the deposit slip?

A

To the bank account

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12
Q

Audit trail includes? 3 things

A

1 Receipt of cash
2 custody over it
3 deposit into bank

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13
Q

Observation of controls is…

A

Not enough for assessment

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14
Q

Restrictively endorsed

A

FDO = for deposit only

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15
Q

Voucher packet

A

All supporting documentation to support writing a check

Ex. Copy of receiving report, copy of invoice from vendor

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16
Q

Vouching is a typical…

A

Staff accountant job

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17
Q

How does auditor find out who authorized signers are?

A

By asking client

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18
Q

Checks prenumbered and accounted for

A

In bank statements or in transit

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19
Q

Bank reconciliation

A

Difference between account balance and bank statement

Transactions client only knows about that bank doesn’t know and
Vice versa

Ex. Outstanding checks, company doesn’t know about interest received in bank account

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20
Q

Footed

A

Added up

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21
Q

Payroll balance = 0, why?

A

Because impressed account

Tracks how much deposited and taken out

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22
Q

Check kiting

A

Cash appears in 2 places at once, matter of timing

Less of problem because updated instantaneously online

Ex. Move $100 from account A to account B and both accounts
Show the $100

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23
Q

Proof of cash is usually used for…

A

Smaller clients

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24
Q

Risk of cash business: completeness

A

Can’t audit cash that’s not been recorded

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25
Q

Order of revenue and collection cycle 4 things

A

1 customer order
2 grant credit
3 ship goods
4 record transaction

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26
Q

Entry to allowance for doubtful accounts

A

Bad debt exp. xxx

Allowance for doubtful accts. xxx

27
Q

What period is bad debt expense effective?

A

Effective during period of entry

28
Q

Matching principle

A

Try to match revenues with expenses

29
Q

3 types of confirmations auditor sends out

A

1 positive confirmation
2 negative confirmation
3 blank confirmation

30
Q

How do you make sure receivables are collectible at year end?

A

Link cash payment in January with A/R balance at year end

31
Q

Confirms get mailed back to…

A

Auditor

32
Q

What do inherent risks related to revenue and collection cycle focus on?

A

Improper revenue recognition

33
Q

Plausible Reasons gross profit may fall

A

1 input prices rise without passing cost to customer
2 increased competition decreases sales price, while cost stays
The same
3 drop most profitable product line

34
Q

Dropping the most profitable product line is an example of

A

Product mix change

35
Q

When a client gives an inaccurate answer (ex. “Gross profit decreased because sales price increased”) what should you ask client?

A

“Can you explain this?”

36
Q

What is it good to compare analytics too?

A

Budget/forecast

37
Q

Who sets control risk?

A

Auditor

38
Q

What is an example of an account that naturally has low inherent risk?

A

Allowance account

39
Q

You must get more evidence when detection risk is…

A

Low

40
Q

You can get less evidence when detection risk is…

A

High

41
Q

Is detection risk mentioned in the audit report?

A

No

42
Q

3 example of improper revenue recognition

A

1 cutoff
2 bill and hold
3 channel stuffing

43
Q

3 inherent risks in revenue and collection cycle

A

1 improper revenue recognition
2 returns and allowances
3 collectibility of receivables

44
Q

Bill and hold example

A

Bill customer with standing order in January in December

Don’t ship inventory until January

45
Q

FOB Destination

A

Title doesn’t transfer to customer until reaches customer

46
Q

What do you need to make a 3rd party give a false confirmation?

A

Collusion

47
Q

Monthly statement

A

Statement of customer balances

48
Q

How can a client show auditor evidence that an account on an aged trial balance is still collectible?

A

Show documented correspondence between client and customer

49
Q

Earnings management: allowance for doubtful accounts

A

In good year overstate allowance for doubtful accounts

and Decrease it in lean year while decreasing bad debt exp.
Thus increasing earnings

50
Q

When testing occurrence vs. Completion, one must…

A

Test in opposite direction

51
Q

Completeness test

A

Trace from shipping documents to sales journal

52
Q

Occurrence test

A

Vouch from sales journal to shipping document

53
Q

Is revenue recognized during earnings management of allowance for doubtful accounts?

A

No

54
Q

Customer tracks balances by voucher/invoice

A

Get slow response time for confirmation

55
Q

60% coverage of $1,000,000 A/R means?

A

$600,000 A/R confirmed

56
Q

Blank confirmation

A

Auditor doesn’t fill in balance amount when sends to customer

57
Q

When should auditor use blank confirmation?

A

When recipient is likely to return positive confirmation without
Verifying accuracy of information

58
Q

What is a positive confirmation sent on?

Who is it sent too? Who is it returned too?

A

Sent on clients letterhead to customer

Returned to auditor

59
Q

What should an auditor do when they send out a positive confirmation and don’t hear back?

A

Need to follow up with customer by phone or email

And document response

60
Q

Subsequent cash receipt

A

Customer paid client after December 31st

61
Q

If you receive a confirm and there’s a difference in balance you should…

A

At least document difference as immaterial or follow up

If you do nothing this is sloppy auditing

62
Q

Client representation letter AKA Management Representation Letter
When is it written? What does it include? 3

A

1 signed at end of audit
2 signed by management
3 letter states management has given every bit of info auditor
Asked including related party transactions

63
Q

Why might the days sales ratio increase?

A

Because client loosened credit policy

64
Q

Higher sales in January may be caused by what?

A

Channel stuffing

Audit (36 decks)

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