Chapter 4 Section 2: Audit Procedures by Transaction Cycle Flashcards
Do you vouch or trace the revenue cycle?
Why?
Vouch because the biggest concern is overstatement.
You want the arrow to point down
Which assertion is influenced by credit approval?
Valuation
Who should make the cash deposit?
The cashier or treasurer
When are positive confirmations best?
For large dollar amounts
When you expect errors or disputes
When there is weak internal control
When are negative confirmations best?
For low risk
Small dollar balances
When you expect customer attention
What assertion do confirmations help?
Existence and rights and obligations
Do you vouch or trace the expenditure cycle?
Why?
Trace because the biggest concern is understatement.
You want the arrow to point up
What are the three functions of accounts payable?
Record the payable
Approve invoice for payment
Record payment after it’s paid by the treasurer
How do you perform a search for unrecorded liabilities?
Review January payments
Was the expense incurred in November or December?
Was the liability recorded or accrued?
What is lapping?
Today’s receipts cover yesterday’s theft
What is kiting?
Cash is recorded at two places at once - you disburse it from one to the other but wait to record the disbursement
How do you guard against lapping?
The use of the lockbox system
Inspect the date the checks are deposited vs when the receivable was credited
How do you detect kiting?
Bank transfer schedule compares the dates checks are drawn to the dates checks are deposited
Do you vouch or trace the inventory cycle?
Why?
Vouch because the biggest risk is overstatement.
You want the arrow to point down
Do you vouch or trace the COGS cycle?
Why?
Trace because the biggest risk is understatement.
You want the arrow to point up
What duties should be segregated in the inventory cycle?
Purchasing
Receiving
Warehouse
Shipping
Do you vouch or trace the investment cycle?
Why?
Vouch because the biggest risk is overstatement.
You want the arrow to point down
How do you evaluate the valuation of the investment cycle?
Compare assigned values to prices published by various sources or from a broker-dealer or appraiser
What do you do to evaluate equity method investments?
Examine the audited financials of the investee
Do you trace or vouch the PPE cycle?
Vouch because the biggest risk is overstatement.
You want the arrow to point down
What are the major transactions associated with PPE?
Purchases Repairs and maintenance Depreciation Disposal Revaluation (IFRS) Leasing
What account should you review to evaluate the completeness of PPE?
Repares and maintenance for additions
Do you vouch or trace the payroll cycle?
Trace because the biggest risk is understatement.
You want the arrow pointing up
Which duties should be segregated in the payroll cycle?
Authorization to employ
Supervisor
Timekeeping
Payroll check preparation
Who distributes checks?
Paymaster
Do you vouch or trace the financing cycle?
Trace because the biggest risk is understatement.
You want the arrow pointing up
