Ch 6 And 7 Class Notes Flashcards
White collar crime
Committed by management
Management can override controls
Lack of separation of duties causes…
Weak internal controls
What heightened awareness of fraud?
SOX
Fraud prevention
Segregation of duties
Collusion
2 people agree to rip off company
3 questions auditor should ask employees about code of conduct
1 does it exist?
2 is it enforced?
3 do you know what’s in it?
Job description
Responsibilities of position
Good internal control
Forced vacation
Example of internal control
What control should organization have in place going into next year?
Budget
What should you do when you receive order without a packing slip?
Have receiving employees count items received
Lapping
Employee steals payment and applies second payment to first
Account
Where does the auditor trace the deposit slip?
To the bank account
Audit trail includes? 3 things
1 Receipt of cash
2 custody over it
3 deposit into bank
Observation of controls is…
Not enough for assessment
Restrictively endorsed
FDO = for deposit only
Voucher packet
All supporting documentation to support writing a check
Ex. Copy of receiving report, copy of invoice from vendor
Vouching is a typical…
Staff accountant job
How does auditor find out who authorized signers are?
By asking client
Checks prenumbered and accounted for
In bank statements or in transit
Bank reconciliation
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
Footed
Added up
Payroll balance = 0, why?
Because impressed account
Tracks how much deposited and taken out
Check kiting
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
Proof of cash is usually used for…
Smaller clients
Risk of cash business: completeness
Can’t audit cash that’s not been recorded
Order of revenue and collection cycle 4 things
1 customer order
2 grant credit
3 ship goods
4 record transaction
Entry to allowance for doubtful accounts
Bad debt exp. xxx
Allowance for doubtful accts. xxx
What period is bad debt expense effective?
Effective during period of entry
Matching principle
Try to match revenues with expenses
3 types of confirmations auditor sends out
1 positive confirmation
2 negative confirmation
3 blank confirmation
How do you make sure receivables are collectible at year end?
Link cash payment in January with A/R balance at year end
Confirms get mailed back to…
Auditor
What do inherent risks related to revenue and collection cycle focus on?
Improper revenue recognition
Plausible Reasons gross profit may fall
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
Dropping the most profitable product line is an example of
Product mix change
When a client gives an inaccurate answer (ex. “Gross profit decreased because sales price increased”) what should you ask client?
“Can you explain this?”
What is it good to compare analytics too?
Budget/forecast
Who sets control risk?
Auditor
What is an example of an account that naturally has low inherent risk?
Allowance account
You must get more evidence when detection risk is…
Low
You can get less evidence when detection risk is…
High
Is detection risk mentioned in the audit report?
No
3 example of improper revenue recognition
1 cutoff
2 bill and hold
3 channel stuffing
3 inherent risks in revenue and collection cycle
1 improper revenue recognition
2 returns and allowances
3 collectibility of receivables
Bill and hold example
Bill customer with standing order in January in December
Don’t ship inventory until January
FOB Destination
Title doesn’t transfer to customer until reaches customer
What do you need to make a 3rd party give a false confirmation?
Collusion
Monthly statement
Statement of customer balances
How can a client show auditor evidence that an account on an aged trial balance is still collectible?
Show documented correspondence between client and customer
Earnings management: allowance for doubtful accounts
In good year overstate allowance for doubtful accounts
and Decrease it in lean year while decreasing bad debt exp.
Thus increasing earnings
When testing occurrence vs. Completion, one must…
Test in opposite direction
Completeness test
Trace from shipping documents to sales journal
Occurrence test
Vouch from sales journal to shipping document
Is revenue recognized during earnings management of allowance for doubtful accounts?
No
Customer tracks balances by voucher/invoice
Get slow response time for confirmation
60% coverage of $1,000,000 A/R means?
$600,000 A/R confirmed
Blank confirmation
Auditor doesn’t fill in balance amount when sends to customer
When should auditor use blank confirmation?
When recipient is likely to return positive confirmation without
Verifying accuracy of information
What is a positive confirmation sent on?
Who is it sent too? Who is it returned too?
Sent on clients letterhead to customer
Returned to auditor
What should an auditor do when they send out a positive confirmation and don’t hear back?
Need to follow up with customer by phone or email
And document response
Subsequent cash receipt
Customer paid client after December 31st
If you receive a confirm and there’s a difference in balance you should…
At least document difference as immaterial or follow up
If you do nothing this is sloppy auditing
Client representation letter AKA Management Representation Letter
When is it written? What does it include? 3
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
Why might the days sales ratio increase?
Because client loosened credit policy
Higher sales in January may be caused by what?
Channel stuffing
