Chapter 10 Auditing Revenue and Related Accounts

Question 1

formal legal document that conveys responsibility to the shipper

Answer 1

Bill of Lading

Question 2

• persuasive evidence of an arrangement exists
• delivery has occurred or services have been rendered
• the seller’s price to the buyer is fixed or determinable
• collectibility is reasonably assured

Answer 2

Criteria for Revenue Recognition

Question 3

procedures applied to sales, sales returns, and cash receipts transactions selected from those recorded during a cutoff period to provide evidence as to whether the transactions have been recorded in the proper period

Answer 3

Cutoff Tests

Question 4

usually several days before and after the balance sheet date

Answer 4

Cutoff period

Question 5

Two populations involved:

1. Sales to Bill of Lading
2. Bill of lading to Sales

Answer 5

Sales cutoff

Question 6

each audit is unique but the auditor will most likely perform some standardized audit procedures, such as obtaining and evaluating an aging of accounts receivable, confirming receivables with customers, performing cutoff tests, and reviewing subsequent collections of receivables

Answer 6

Substantive Tests of Accounts Receivable

Question 7

Used to:

• agree the detail to the balance in the control account
• select customer balances for confirmation
• identify amounts due from officers, employees, or other related parties or any nontrade receivables that need to be separately disclosed in the financial statements
• help determine the reasonableness of the allowance for doubtful accounts by identifying past-due balances

Answer 7

Accounts Receivable Aging

Question 8

• review and test the process used by management, as well as the underlying controls, to develop the estimate
• develop an independent model to estimate the accounts and update the model each year
• Review subsequent events or transactions occurring prior to completion of fieldwork, particularly subsequent collections

Answer 8

Audit of the allowance for doubtful accounts

Question 9

• review sec filings
• reviewing the accounts receivable trial balance
• inquiring of management and the audit committee
• communicating the names of identified related parties so that the audit team members can be alert to related-party transactions

Answer 9

Audit of related-party transactions

Question 10

letters sent to selected customers asking them to review the current balance or unpaid invoices due the client and return the letters directly to the auditor indicating whether they agree with the balance

Answer 10

Positive confirmation

Question 11

asks the customer to review the client’s balance but requests the customer to respond directly to the auditor only if the customer disagrees with the indicated balance

Answer 11

Negative confirmation

Question 12

when customers do not respond to positive confirmation requests, the auditor perform these procedures including:

• Subsequent collection of the balance after year end
• examination of supporting documents

Answer 12

Alternative procedures

Question 13

what may appear to be a timing difference is actually a way to cover up the embezzlement of cash. an irregularity that may be detected by confirmations

Answer 13

Lapping

Question 14

procedures when accounts are confirmed at an interim date. include the following:

• compare individual customer balances at interim date with year end balances and confirm any that have substantially increased
• compare monthly sales, collections, sales discounts and sales returns and allowances during the roll forward period with those for prior months and years to see if they appear out of line
• reconcile receivable subsidiary records to the general ledger at both confirmation date and Y/E

Answer 14

Roll Forward procedures