Chapter 14 Slides

Question 1

five classes of transactions in the sales and collection cycle

Answer 1

1. sales
2. cash receipts
3. sales returns and allowances
4. write-off of uncollectible accounts
5. estimate of bad debt expense

Question 2

to gain an understanding of internal controls over sales, auditor can

Answer 2

use flowchart or other documentation and perform walkthrough tests

Question 3

four steps to assess planned control risk for sales

Answer 3

1. determine framework for assessing control risk, provided by transaction-related audit objectives
2. identify key internal controls and deficiencies for sales
3. associate the key internal controls and deficiencies with the audit objectives
4. assess control risk for each objective by evaluating controls and deficiencies

Question 4

key internal controls for sales (4)

Answer 4

1. separation of duties
2. proper authorization (credit checks, pricing)
3. adequate documents and records
4. prenumbered documents
5. monthly statements to customers
6. internal verification process

Question 5

3 types of misstatements with the occurrence of recorded sales

Answer 5

1. sales included in the journals for which no shipment was made
2. sales recorded more than once
3. shipments made to nonexistent customers and recorded as sales

Question 6

existence is less likely to be tested for sales transactions because…

Answer 6

the risk of overstatement is more likely than understatement

Question 7

tracing direction

Answer 7

from source documents to journals tests for omitted transactions (completeness)

Question 8

vouching direction

Answer 8

from journals back to source documents tests for nonexistent transactions (occurrence)

Question 9

auditor concerns whether sales are accurately recorded

Answer 9

1. shipping the amount of goods ordered
2. accurately billing for the amount of goods shipped
3. accurately recording the amount billed in the accounting records

Question 10

properly designed and formatted audit procedures do 3 things

Answer 10

1. eliminate duplicate procedures
2. all procedures on any one document are completed at the same time
3. enables the most effective order in which to perform procedures

Question 11

transaction-related audit objectives are essentially the same for credit memos as for processing sales, with two notable differences

Answer 11

1. materiality: sales returns and allowances are typically immaterial
2. emphasis on occurrence objective

Question 12

methodology for tests of controls and substantive tests of transactions for cash receipts as they use for sales (3)

Answer 12

1. determine key ICs for each audit objective
2. design tests of control for each control used to support reduced control risk
3. design substantive tests of transactions to test for monetary misstatement for each objective

Question 13

determining whether cash received was recorded

Answer 13

theft difficult to detect if occurs BEFORE cash is recorded; use prenumbered remittance advices and prelists of cash receipts

Question 14

prepare proof of cash receipts

Answer 14

total cash receipts recorded in the journal for a specific period is compared with the amount of cash deposited in the bank during the same period

Question 15

test to discover lapping of AR

Answer 15

adequate separation of duties (cash and receipts); vacation

Question 16

lapping

Answer 16

postponing entries for cash receipts to conceal an existing cash shortage

Question 17

recorded sales are for shipments made & actual customers

Answer 17

occurrence

Question 18

existing sales transactions are recorded

Answer 18

completeness

Question 19

recorded sales are for amount shipped and correctly billed/priced

Answer 19

accuracy

Question 20

sales transactions are properly included, summarized, in master

Answer 20

posting & summarization

Question 21

sales transactions are properly classified

Answer 21

classification

Question 22

sales transactions are recorded on the correct dates

Answer 22

timing

Question 23

recorded cash receipts are for funds actually received by company

Answer 23

occurrence

Question 24

cash received is recorded in CR journal

Answer 24

completeness

Question 25

cash receipts are deposited and recorded at the amounts received

Answer 25

accuracy

Question 26

cash receipts are correctly included in the AR master file and correctly summarized

Answer 26

posting and summarization

Question 27

cash receipts are correctly classified

Answer 27

classification

Question 28

cash receipts are recorded on the correct dates

Answer 28

timing

Question 29

auditor's concern in write-off of uncollectible accounts

Answer 29

possibility that write-offs are used to cover up embezzlement of cash receipts

Question 30

auditor is also concerned with the balance-related objective of the __ __ of net accounts receivable

Answer 30

realizable value

Question 31

two controls that address realizable value of AR

Answer 31

1. preparation of periodic aged AR trial balance for review and follow-up by appropriate management personnel 2. policy of writing off uncollectible accounts when they are no longer likely to be collected

Question 32

how are sales overstated? who/what motivates? methods?

Answer 32

1. errors, fraud 2. salesforce, management 3. returns, allowances, discounts, timing, order errors

Question 33

overstatement of AR how, why, methods

Answer 33

1. errors, fraud 2. salesforce, management 3. bad debt, allowances

Question 34

separation of duties in sales (3)

Answer 34

1. credit granting from sales 2. cash receipts from sales 3. cash receipts from recording

Question 35

3 times need authorization for sales

Answer 35

1. credit before sales takes place 2. goods shipped after proper authorization 3. prices and terms authorized

Question 36

simple technique for proof of cash for small businesses

Answer 36

1. bank statement (debits/credits) 2. book accounts 3. reconcile

Question 37

if results of TOCs and STOTs are unsatisfactory, auditor will need to do

Answer 37

more substantive testing

Question 38

2 industries that present special issues in revenue recognition

Answer 38

1. software firms 2. construction firms

Question 39

most significant effect of results of TOCs and STOTs in sales and collection cycle is on the __ __

Answer 39

confirmation process (affects type of confirmation, size of samples, timing)