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Audit > Exam 3 Chapter 7 > Flashcards

Exam 3 Chapter 7 Flashcards

1
Q

Accounting Cycle

A

A collection of activities associated with a series of related transactions

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2
Q

5 Accounts associated with Revenue and Collection Cycle

A

Accounts Receivable
Allowance for Doubtful Accounts
Bad Debts Expense
Sales Revenue
Sales Returns, Allowances, or Discounts

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3
Q

3 Improper Revenue Recognition Schemes

A

Cut Off
Bill and Hold
Channel Stuffing

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4
Q

Cut Off

A

Are sales cut off at the appropriate time

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5
Q

Bill and Hold

A

When revenue is recognized even though inventory hasn’t been shipped out

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6
Q

Channel Stuffing

A

Boosting revenue through extremely discounted sales to get inventory out the door

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7
Q

3 main assertions associated with the Sales Revenue account?

A

Occurrence
Completeness
Cutoff

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8
Q

3 main assertions associated with the Accounts Receivable account?

A

Existence
Completeness
Valuation (for allowance account)

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9
Q

Positive Confirmations

A

Confirmations sent to customers and required to be received back

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10
Q

When are Positive Confirmations used?

A

When there are a small number of accounts but a large number of errors or large amounts that will be material

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11
Q

Negative Confirmations

A

Confirmations sent to customers but not required to be returned if correct

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12
Q

When are Negative Confirmations used?

A

When inherent and control risk are low
A large number of small balances are involved
The auditor has no reason to believe that recipients are unlikely to give consideration

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13
Q

Blank Confirmatiosn

A

Confirmations used when the recipient is likely to return a positive confirm without verifying the accuracy of the information
(Usually asks customers how much they owe your client)

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14
Q

Why do Negative Confirmations not provide the auditor with persuasive evidence as Positive Confirmations

A

Non responses are hard to interpret

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15
Q

3 times when would an auditor not have to conduct confirmations of accounts receivable?

A

Its not material to the financial statements
Risk of Material Misstatement is Low
Confirmation is expected to be ineffective based on prior year experience

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16
Q

What are Alternative Procedures?

A

Procedures used when confirmations dont work
(Ex: vouching subsequent cash collection to check AR balance)

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17
Q

Order to Cash

A

The process from sales order to cash payment for your client

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18
Q

Should days sales in AR be low or high

A

Low

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19
Q

Should AR turnover be low or high

A

High

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20
Q

Which assertion do Confirmations help with

A

Existence

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21
Q

What % of Confirmations do you want back?

A

25% to 30%

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22
Q

4 Basic Activities in the Revenue and Collection Cycle?

A

Receiving customer orders
Delivering to customers
Billing customers (and accounting for AR)
Depositing cash received

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23
Q

System Generated Reports and Data Files (READ)

A

Pending order and backorder master file
Customer master file
Price list master file
Sales detail/journal file
Sales analysis report
Accounts receivable listing and aging
Cash receipts listing
Customer statements

24
Q

What is the inherent risk of Returns and Allowances?

A

Not recognizing returns or large enough allowances for estimated returns

25
Q

What is the inherent risk of Collectability of Receivables?

A

Manipulating estimates

26
Q

4 parts of SEC Guidance for Revenue Recognition

A

Evidence of an arrangement exists
Delivery/service has occurred
Sellers price is fixed/determinable
Collectability is reasonably ensured

27
Q

FASB 5 step process for Revenue Recognition

A

Identify contracts with customer
Identify performance obligations in contract
Determine transaction price
Allocate transaction price to performance obligations
Recognize revenue when entity satisfies performance obligation

28
Q

What could go wrong with the Occurrence assertion for Revenue?

A

Management may overstate sales by adding fictitious transactions
Management may fail to recognize possibility of customer returns

29
Q

What could go wrong with the Completeness assertion for Revenue?

A

Not all sales are recorded

30
Q

What could go wrong with the Cutoff assertion for Revenue?

A

Sales have been recorded in incorrect periods

31
Q

What could go wrong with the Existence assertion for AR?

A

AR is overstated and doesnt represent amounts owed from sales

32
Q

What could go wrong with the Completeness assertion for AR?

A

Not all AR have been recorded

33
Q

What could go wrong with the Valuation assertion for AR?

A

Receivables are not included in financial statements at the proper amount
Uncollectible portion of the balance is not properly estimated

34
Q

Internal Control Activities for Occurrence assertion for Revenue?

A

Invoices supported by customer PO’s
Bill of Ladings exist for all invoices
Recorded sales in Sales Revenue account are supported by invoices
Management analyzes sales returns regularly and estimates allowances

35
Q

Internal Control Activities for Completeness assertion for Revenue?

A

Invoices, shipping documents, and sales orders are prenumbered and numerical sequence is checked

36
Q

Internal Control Activities for Cutoff assertion for Revenue?

A

Date of shipping document is compared to invoice date
Management evaluates all new contracts to ensure revenue recognition compliance

37
Q

Internal Control Activities for Existence assertion for AR?

A

Management review the sales order and shipping document to verify that sales were earned and a customer owes a balance

38
Q

Internal Control Activities for Completeness assertion for AR?

A

Management compares invoices with the shipping document and AR ledger

39
Q

Internal Control Activities for Valuation assertion for AR?

A

Receivables are not included in financial statements at the appropriate amount
Uncollectible portion of the balance is not properly estimated

40
Q

3 Steps for Auditing Accounts Receivable

A

Test and confirm trial balance
Perform analytical procedures
Test sales cut-off

41
Q

2 Analytical Procedures for Sales Revenue

A

Comparing with previous periods
Comparing with industry standards

42
Q

2 Analytical Procedures for Allowance for Doubtful Accounts and Bad Debt Expense

A

Check Bad Debt Expense as a percentage of sales
Check the Allowance for Doubtful Accounts as a percentage of Gross Receivables

43
Q

2 Analytical Procedures for Accounts Receivable

A

Calculate Days Sales in Accounts Receivable
Calculate Accounts Receivable Turnover

44
Q

Why do we primarily use Confirmations?

A

To verify existence

45
Q

4 factors likely to affect the reliability of confirmations

A

Previous audit experience
Intended recipient of the confirmation
Type of info being confirmed
Type of confirmation being sent

46
Q

Should all confirmations returned by the post office as nondeliverable by investigated?

A

Yes

47
Q

Which confirmations provide more reliable evidence?

A

Positive and Blank Confirmations

48
Q

What is a potential problem with AR Confirmations

A

Recipients might not report understatements

49
Q

What might Confirmations not produce sufficient evidence of?

A

Ownership (Ex: factored receivables)

50
Q

Auditors should always follow up on electronic responses unless

A

The e-response came from an independent intermediary

51
Q

3 things you should do when there are nonresponses to Positive and Blank Confirmations

A

Follow up with 2nd and maybe 3rd requests
Consider that lower response rates might mean fictitious customer accounts
Do alternative procedures

52
Q

2 things you should remember when there are nonresponses to Negative Confirmations

A

Remember that this confirmation only offers limited evidence
Do not do alternative procedures

53
Q

2 procedures for Sales Cutoffs

A

Examine sales invoices and shipping docs shortly before and after year end
Examine returns after year end

54
Q

What are Sales Cutoffs used for?

A

Used to verify whether the sales/revenue was recorded in the correct period

55
Q

4 Alternative Procedures when the Confirmation process doesnt work

A

Vouch subsequent cash collections (for existence, valuation)
Examine shipping documents (especially bills of lading)
Examine supporting documentation (if internal controls are good)
Inspect correspondence files

56
Q

4 parts of Auditing Uncollectible Accounts

A

Inspect customer files (for collectability)
Recalculate reasonableness (for allowance and bad debt expense)
Inspect documentation for appropriateness (of write offs and authorization)
Inspect documentation for collection procedures

57
Q

When are confirmations required?

A

When the accounts receivable is material for a client

Audit (8 decks)

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