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Financial Reporting > Chapter 7 - Revenue and Collection Cycle > Flashcards

Chapter 7 - Revenue and Collection Cycle Flashcards

1
Q

4 basic activities of the revenue and collection cycle

A
  1. receive and process customer order
  2. deliver
  3. bill
  4. receive payment
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2
Q

what sparks the recording or revenue and AR?

A

invoice

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3
Q

3 steps of using the audit risk model

A
  1. set audit risk at the desired level
  2. assess RMM
  3. set detection risk at the significant account and assertion level based on the level of audit risk and RMM
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4
Q

when using the audit risk model, we set the detection risk at the significant account and assertion based on..

A

the level of audit risk and RMM

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5
Q

AS 2110 indicates…

A

The auditor should presume that there is a fraud risk involving improper revenue recognition

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6
Q

3 inherent risks

A
  1. improper revenue recognition
  2. returns and allowances
  3. collectability of receivable
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7
Q

3 types of improper revenue recognition risks

A
  1. cutoff
  2. bill and hold
  3. channel stuffing
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8
Q

bill and hold refers to…

A

recognizing revenue before delivery

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9
Q

channel stuffing refers to..

A

sending more product than the client ordered to inflate sales

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10
Q

sales are typically recorded…

A

net

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11
Q

relevant assertions of revenue

A

occurrence, completness, cutoff

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12
Q

relevant assertions of accounts receivable

A

existence, completeness, valuation

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13
Q

net sales = what assertion?

A

occurance

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14
Q

net AR = what assertion?

A

valuation

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15
Q

revenue is recognized when..

A

good and service are transferred to customers for the amount the company expects to be entitled

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16
Q

revenue is a ____ process

A

top-down

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17
Q

auditors want to ensure revenue is only recorded…

A

once

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18
Q

sec guidance on revenue recognition says what?

A

pervasive evidence that the revenue exists, delivery, sales price is fixed and determinable, and collectability is reasonably assured

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19
Q

5 key revenue and collection cycle key procedures

A
  1. separation of duties
  2. authorization of transactions
  3. access to assets
  4. adequate documentations
  5. undefended check on performance
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20
Q

4 components of authorization of transactions

A
  1. write offs
  2. EDI transactions
  3. credit checks for approval of sale
  4. pricing
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21
Q

adequate documents and records includes…

A

prenumbered sales order, shipping documents, and sales involves, remittance advice

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22
Q

2 components of independent checks on performance

A
  1. AR subsidiary ledger to general ledger
  2. monthly statement to the customer
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23
Q

main goal of auditor is to…

A

have enough support to conclude whether the controls activities are operating effectively

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24
Q

we perform tests of controls because..

A

we must gain sufficient evidence to conclude if control activity is operating effectively

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25
Q

5 test of controls

A
  1. client inquiry
  2. inspections of docs
  3. walk thoughts
  4. re performance
  5. observation
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26
Q

if controls are not in place or the organization is not performing control effectively, we…

A

use substantive procedures

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27
Q

substantive procedures are determined to see..

A

if control fails, produce MM in financial statements

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28
Q

for cash and its occurance assertion, what test of IC do we use?

A

vouching of sales

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29
Q

for cash and its cutoff assertion, what test of IC do we do?

A

trace shipping

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30
Q

vouching starts where and ends where?

A

sales invoice, shipping docs

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31
Q

tracing starts where and ends where?

A

shipping docs, sales invoice

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32
Q

for the collection cycle, we vouch…

A

sample of invoices to shipping documents

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33
Q

for the collection cycle, we trace…

A

shipping docs to involves

34
Q

vouching relevent assertion

35
Q

tracing relevent assertion

A

completeness

36
Q

vouching moves in what direction?

37
Q

tracing moves in what direction?

38
Q

to record revenue, you need a _____ match

39
Q

substantive procedures are designed to…

A

obtain direct evidence about assertions related to a specific balance or transaction

40
Q

controls testing is designed to…

A

collect evidence of the company’s own control activities

41
Q

what assertions are dual purpose?

A

completeness and occurance

42
Q

a decrease in CR ____ substantive procedures on account balances

43
Q

a reduction in substantive procedures results in…

A

audit efficieivences

44
Q

audit efficiency has a ____ sample size

45
Q

greater substantive procedures means ____ sample size

46
Q

a decrease in CR creates a ____ in auditors assessment of the RMM in revenue cycle

47
Q

substantive analytical procedure is used to..

A

estimate a balance than compare

48
Q

a substantive test of detail is used to…

A

directly test the transactions that make up an account or estimate

49
Q

confirmation are a substantive ____

A

test of detail

50
Q

4 steps of auditing accounts receivable

A
  1. test AR aged trial balance
  2. confirm balances
  3. perform analytical procedures
  4. test sales cut off
51
Q

3 categories of analytical procedures for AR

A
  1. sales revenue
  2. ADA BDA
  3. AR
52
Q

analytical procedures for sales revenue

A
  1. comparisons with previous periods
  2. industry comparisons
53
Q

ADA and BDA analytical procedures

A
  1. BDE as a % of sales
  2. ADA as a % of gross receivables
54
Q

AR analytical procedures

A
  1. daily sales AR
  2. AR turnover
55
Q

confirmation primarily verify what assertion?

56
Q

accounts to be confirmed are documented through the…

A

aged trial balance

57
Q

4 factors to likely affect the reliability of confirmations

A
  1. previous audit experience
  2. recipient of confirmation
  3. type of info being confirmed
  4. type of confirmation
58
Q

for positive confirmations, a _____ number of accounts are involved

59
Q

for positive confirmations, the accounts are _____

60
Q

for positive confirmations, recipient responds if…

A

the amount is correct or incorrect

61
Q

for negative confirmations, there is a ___ level of RMM

62
Q

for negative confirmation, what risks are low?

A

control risk, RMM

63
Q

blank confirmation are used if…

A

the recipient is likely to return the confirmation without verifying the accuracy of the info

64
Q

only use negative confirmations when…

A

the RMM is low

65
Q

exception of sending confirmations

A
  1. immaterial
  2. sufficient substantive testing
  3. low risk of MM
66
Q

what confirmation are the most reliable?

A

positive and blank

67
Q

recipients are AR confirmation may not report ____ because there is no incentive

A

underestimates

68
Q

if there is not response for positive and blank confirmations..

A

you should follow up and perform analytical procedures

69
Q

for no response for negative confirmation…

A

alternative procedures are not needed

70
Q

sales cutoff procedures are used to…

A

verify that sales and revenue are recorded in the right period

71
Q

for sales cut off procedures, we should examine…

A

shipping documents, involves, and returns shortly after YE

72
Q

4 confirmation alternative procedures

A
  1. vouch subsequent cash collections
  2. examine shipping docs
  3. examine client produced docs
  4. inspect correspondance files
73
Q

vouching subsequent cash collection is usually sufficient evidence of what assertions?

A

existence and valuation

74
Q

4 steps for uncollected accounts

A
  1. inspect files for collectability
  2. recalculate BDA and allowance
  3. verify reasonableness
  4. inspect docs for appropriateness of accounts written off
75
Q

companies reduce CR by having suitable…

A

operation of authority, custody, recording, and periodic reconciliation duties

76
Q

error checking activities of comparing customer order and shipping documents are important for…

A

billing customers the correct prices for the delivered quantities

77
Q

the primary substantive audit procedure is..

A

confirmation

78
Q

confirmations of what accounts are required?

A

loans, AR and NR

79
Q

confirmation of _______ should not be used as the only evidence of the ownership of assets

A

AR, NR, and loans receivable

80
Q

confirmation for AR, NR, and loans receivable should not be used as the only evidence of the…

A

ownership of rights

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