chapters 10 and 11 auditing Flashcards
chapters 9 and 10 auditing
Revenue Recognition
Revenue is defined as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s major or central operations.
Five-Step Approach to Revenue Recognition
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when the entity satisfies a performance obligation.
Types of Transactions and Financial Statement Accounts Affected
- The sale of goods or rendering of a service for cash or credit.
- The receipt of cash from the customer in payment for goods or services.
- The return of goods by the customer for credit or cash.
6 Types of Documents and Records
Credit Approval Form
For credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer.
Customer Sales Order
Contains the details of the type and quantity of products or services ordered by the customer.
Cash Receipts Journal
This journal is used to record the cash receipts of the entity.
Shipping Document
This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information.
Sales Invoice
The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price, and the terms of trade.
Sales Journal
Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction.
Monitoring of Controls
The auditor must understand how management assesses the design and operation of controls in the revenue process. This understanding should include how supervisory personnel review the personnel who perform the controls and evaluate the performance of the entity’s IT function.
In order to
properly set
control risk, theauditor must testcontrols over therevenue process.Such tests may include
Inquiry of client personnel
Inspection of documents and records
Observations of the operation of the control
Walkthroughs
Reperformance of the control activities
The level of control risk for the revenue process
can be set using either
quantitative amounts or qualitative terms such as “low,” “medium,” or “high.”
Assertions about Classes of Transactions
Occurence
completeness
accuracy/valuation
cutoff
classification
presentation
What type of assertion is this: Revenue recorded, good not shipped, or services not performed.
Occurrence
What type of assertion is this: Goods shipped or services performed, revenue not recorded
Completeness
What type of assertion is this: Goods shipped or services performed for a customer who is a bad credit risk
Authorization
What type of assertion is this: Revenue transaction recorded at an incorrect dollar amount
Accuracy
What type of assertion is this: Revenue transactions recorded in the wrong period
Cutoff
What type of assertion is this: Revenue transaction not properly classified
Classification
What type of assertion is this: Revenue transactions not properly presented and disclosed
Presentation
Substantive analytical procedures
are used to examine plausible relationships among revenue related accounts.
Tests of details
focus on transactions, account balances, or disclosures. Tests of details concentrate on the ending balance for accounts receivable and related accounts as well as related disclosures.
Ratios used for comparative purposes include
- Receivables turnover and days outstanding in accounts receivable
- Aging categories on aged trial balance of accounts receivable
- Bad-debts expense as a percent of revenue
- Allowance for uncollectible accounts as a percent of accounts receivable or credit sales
- Large customer account balances compared to last period
Confirmation
Confirmation is audit evidence that is a direct written response from third parties about the account receivable balance. Confirmation is a good source of evidence about the existence of the accounts receivable. The confirmation process should be controlled by the auditor.
Positive Confirmation
Requests that customers indicate whether they agree with the amount due to the client. A response is expected whether the customer agrees or disagrees with the balance indicated.
Timing
Accounts receivable may be confirmed at an interim date or at year-end. The confirmation request should be sent soon after the end of the accounting period in order to maximize the response rate.
Alternative Procedures
When the auditor does not receive responses to positive confirmations, alternative audit procedures are used. These alternative procedures include:
Examination of specific subsequent cash receipts
Examination of shipping documentation
Examination of other client documentation
Negative Confirmation
Requests that the customer respond only when they disagree with the amount due to the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low.
Overview of the Purchasing Process
Purchase requisition
Purchase order
Receiving report and liability recorded
Vendor
Purchase requisition
request to purchase goods or services
Vendor invoice
Vendor invoice – the bill from the vendor.
Voucher
serves as the basis for recording a vendor’s invoice
Purchase order
includes description, quality, and quantity of goods or services being purchased.
Receiving report
records the receipt of goods
Voucher register/purchases journal
used to record vouchers for goods and services.
Accounts payable subsidiary ledger
includes amount owed to individual vendors.
Vendor statement
represents the purchase activity with vendor
Check/EFT
pays for goods or services
Cash disbursements journal/check register
contains columns to record credits to cash and debits to accounts payable and cash discounts.
Functions of the Purchasing Process
Requisitioning
purchasing
receiving
invoice processing
disbursements
accounts payable
general ledger
If the results of the tests of controls support the planned level of control risk, the auditor?
conducts substantive procedures at the planned level
If the results do not support the planned level of control risk, the auditor
reduces the detection risk, which will increase substantive procedures over the planned level.
Audit Assertions about Account Balances, and related disclosures, at the Period End:
Existence.
Rights and obligations.
Completeness.
Accuracy, Valuation and allocation.
Classification
Presentation
All identified misstatements should be aggregated (including any consideration for sampling risk). The projected misstatement is then compared to tolerable misstatement. If the projected misstatement is less than the tolerable misstatement, the auditor has evidence that the account is
fairly presented
if the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the account is
not fairly presented
