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MGT3160 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Business functions for the revenue cycle

A 
Processing customer orders
Granting credit
Shipping goods
Billing customers
Recording sales
Processing and recording cash receipts
Processing and recording returns and allowances
Writing off uncollectible AR
Providing for bad debts
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2
Q

How are analytical procedures used in the audit of the revenue cycle?

A
  • perform preliminary analytical procedures to highlight potential misstatements
  • highlight potential warning signals or symptoms of revenue fraud
  • compare client data with industry performance data and nonfinancial data
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3
Q

Which possible misstatement relates to the following analytical procedure: Evaluate the ratio of returns and allowances to sales

A

Unusual sales arrangements

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4
Q

Which possible misstatement relates to the following analytical procedure: Compare bad debt expense as % of gross sales with that of previous yrs

A

Uncollectible AR that have not been provided for

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5
Q

Which possible misstatement relates to the following analytical procedure: Compare # of days AR outstanding with that of previous yrs

A

Oversatement or understatement of allowance fo uncollectible accounts and bad debt expense

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6
Q

Which possible misstatement relates to the following analytical procedure: Compare aging categories as a % of AR with those of previous yrs

A

Oversatement or understatement of allowance for uncollectible accounts and bad debt expense

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7
Q

Which possible misstatement relates to the following analytical procedure: Compare allowance for uncollectible accounts as a % of AR with that of previous years

A

Overstatement or understatement of allowance for uncollectible accounts

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8
Q

Which possible misstatement relates to the following analytical procedure: Evaluate cash receipts collected after yr end to cash receipts during yr

A

If slow, special sales arrangements

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9
Q

Which cycle is the only cycle for which a fraud risk assessment is required?

A

revenue cycle

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10
Q

Which assertion is related to the following fraud scheme: Fictitious revenues or sham sales

A

Occurence

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11
Q

Which assertion is related to the following fraud scheme: Premature revenue recognition

A

Occurence and cutoff

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12
Q

Which assertion is related to the following fraud scheme: Round-tripping or recording loans as sales

A

Occurence

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13
Q

Which assertion is related to the following fraud scheme: Improper cutoff of sales

A

cutoff

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14
Q

Improper recording of sales from “bill and holds” that do not meet criteria for revenue recognition

A

Occurence and possibly cut off

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15
Q

Which assertion is related to the following fraud scheme: Side arrangements that change the original terms of sale (such as a consignment arrangement or generous right of return) or not meeting requirements for recording revenue

A

Occurence

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16
Q

Which assertion is related to the following fraud scheme: Manipulation of adjustments and estimates - returns and allowances are not recorded or are understated? or bad debts are understated?

A

Completeness (returns & allowances)
Valuation and/or existence (AR)
valuation (AR)

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17
Q

Indicators that an entity may be engaged in fraudulent financial reporting (revenue cycle)

A
  • mgmt placing high emphasis on the need for a particular accounting treatment
  • transactions that involve nonconsolidated related parties have not been properly reviewed or approved
  • transactions involve previously unidentified related parties that do not have the substance or financial strength to support the transaction
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18
Q

Substantive tests of details for revenue: when tracing from source shipping documents to the journals, what is the purpose of the test? What assertion is being tested?

A

To test for ommitted transactions. Completeness.

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19
Q

Substantive tests of details for revenue: when vouching from journals back to the supporting documents, what is the purpose of the test? What assertion is being tested?

A

To test for nonexistent transactions. Occurence.

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20
Q

Substantive test of details for revenue: when designing tests for occurence, the auditor is concerned about which potential misstatements?

A
  • sales being includd in journals for which no shipment was made
  • sales recorded more than once (duplicates)
  • shipments made to nonexistent customers and recorded as sales (fictitious sales)
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21
Q

Substantive test of details for revenue assertions. What do tests of the completeness assertion check?

A

all revenues are recorded.

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22
Q

Substantive test of details for revenue assertions. What do tests of the accuracy assertion check?

A

the correct amount of goods ordered has been shipped, the correct price was used when billing for the amount of goods, the amount billed was accurately recorded in the accounting records

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23
Q

Substantive test of details for revenue assertions. What do tests of the cutoff assertion check?

A

perform cutoff tests with sales transactions before and after year end to provide assurance of completeness and occurence of sales transactions

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24
Q

Substantive test of details for revenue assertions. What do tests of the classification assertion check?

A

Is the company the seller with a primary obligation to the customer, or is the company a seller acting as an agent?

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25
Q

What are the two key sources of information for substantive tests of details for accounts receivable?

A

Aged AR trial balance, external confirmations

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26
Q

What is the aged AR trial balance used for in a substantive test of details for accounts receivable?

A
  • agree the accuracy between subledger and general ledger, including allocation to correct accounts
  • select samples for confirmation
  • identify unusal transactions
  • evaluate classification of AR with related parties
  • identify credit balances, which if significant should be reclassified as AP
27
Q

When is the most reliable evidence from confirmations for substantive tests of details for accounts receivable obtained?

A

As close to the balance sheet date as possible.

28
Q

How do pre-numbered shipping docs & sales invoices prevent misstatement? How can they be used as a control? Which audit assertions do they address?

A

Prevent failure to bill, or duplicate billing.
Someone can periodically account for all numbers in a sequence and investigate missing or duplicate numbers.
Provides evidence of “existence” and “completeness”.

29
Q

How is payroll related to inventory?

A

In manufacturing and construction companies, payroll is a significant portion of inventory valuation. Improper account classification of payroll can affect asset valuation for work in process, finished goods, etc.

30
Q

What is an example of fraudulent payroll transaction?

A

Continuing to pay an employee after his or her employment has been terminated.

31
Q

How it the payroll cycle different from other cycles in a typical audit?

A
  • only one class of transactions
  • transactions (IS) are far more significant than related balance sheet accounts. ie. payroll-related BS account will only be accrued salary payable.
  • internal controls over payroll are effective for almost all companies, even small ones.
32
Q

Key controls for the payroll cycle

A
  • proper authorization
  • adequate segregation of duties
  • master file change controls
  • access rights management
  • timekeeping and payroll preparation controls
  • payroll payment controls
  • employee withholdings and benefit remittance controls
33
Q

Tests of the bank reconciliation

A
  • verify that bank rec is mathematically accurate
  • trace the balance on the cutoff statement to the balance per bank on the bank reconciliation
  • trace cheques included with the cutoff bank statement to the list of outstanding cheques on the bank rec and to the cash disbursements journal
  • investigate all significant cheques or pmts included on the outstanding cheque list that have not cleared the bank on the cutoff statement
  • trace deposits in transit to the subsequent bank statement
  • account for bank service charges, bank errors and corrections
34
Q

Kiting

A

Embezzling money by drawing a cheque from one bank account to another immediately before the end of the accounting period

35
Q

How do auditors test for kiting or errors?

A

List all bank transfers made a few days before and after the BS date and trace each to the accounting records for proper recording.

36
Q

Which contingent liabilities are auditors most concerned with?

A
  • pending litigation eg patent infringement
  • income tax disputes
  • product warranties
  • notes receivable discounted
  • guarantees of obligations of others
  • unused balances in outstanding letters of credit
37
Q

Auditor’s three objectives in verifying contingent liabilities

A
  • classification (correct accounting treatment used)
  • valuation (reasonable estimate)
  • completeness (identify any contingencies not identified by mgmt.)
38
Q

The balance sheet date is the 31st of December. The auditor’s report date is the 1st of April. When are subsequent events reviewed? What time period of events are reviewed?

A

Subsequent events will be reviewed approximately between March 1 and April 1. The auditor is responsible for subsequent events that occur from the balance sheet date until the audit report date (Jan 1 to April 1)

39
Q

Client representation letter

A
  • written by the client (manager)
  • on the client’s letter head
  • addressed to the public accounting firm (auditor)
  • signed by high level (eg CFO, president)
  • states that information has been provided to the auditor during the engagement
  • do not confuse with management letter which is FROM accounting firm TO the client’s audit committee
40
Q

summarize, evaluate, and resolve misstatements

A

Auditors are required to accumulate all unadjusted misstatements assessed as not “clearly trivial” and request mgmt. corrects them.

41
Q

Why might a quantitatively small misstatement be considered material?

A
  • fraud
  • materially affects a future period even if immaterial in the given period
  • may have a “psychic” effect
  • the item increases management’s bonus
42
Q

What is the auditor looking for in the review of the annual report?

A

That the financial statements in the auditor’s report are accurately reproduced in the annual report.

43
Q

List the audit procedures the auditor conducts for subsequent events

A
  • inquiry of management
  • correspondence with law firms
  • review of internal financial statements prepared subsequent to BS date
  • review of records prepared subsequent to BS date
  • examination of minutes (meetings) subsequent to BS date
  • acquisition of letter of representation
44
Q

What is an unmodified audit opinion?

A

AKA unqualified or clean; all auditing conditions have been met; no significant misstatements have been discovered and left uncorrected; auditor believes that the financial statements are fairly stated in accordance with the applicable financial reporting framework. The most common type of audit opinion.

45
Q

Which audit opinion will be issued when: financial statements are materially misstated, and it is material but not pervasive?

A

qualified (“except for”) opinion

46
Q

Which audit opinion will be issued when: financial statements are materially misstated, and it is material and pervasive

A

adverse opinion

47
Q

Which audit opinion will be issued when: there was an inability to obtain appropriate audit evidence, and it is material but not pervasive

A

qualified (“except for”) opinion

48
Q

Which audit opinion will be issued when: there was an inability to obtain sufficient appropriate audit evidence, and it was material and pervasive

A

disclaimer of opinion

49
Q

Two conditions requiring a departure from an unmodified audit report

A
  • scope departure

- GAAP departure

50
Q

How does materiality affect the audit opinion?

A

3 levels: immaterial, material but not pervasive, highly material and pervasive.

For conditions involving an accouning violation, level of materiality decides if the opinion will be unmodified, qualified, or adverse.

For conditions involving a scope restriction, the materiality will decide if the opinion is unmodified, qualified, or disclaimer of opinion.

51
Q

What is the suitable engagement for stakeholders of a publicly accountable entity?

A

audit

52
Q

What is the suitable engagement for a private company that has outside investors or external financing

A

audit, review, or compilation

53
Q

What is the suitable engagement for a private company that has plans to grow and attract new stakeholders and financing

A

audit or review

54
Q

What is the suitable engagement for family members and a few close friends of a private company

A

review or compilation

55
Q

What is the suitable engagement for management and for the tax returns

A

review or compilation

56
Q

specified procedures engagements

A

Procedures are agreed upon between the public accountant and the responsible party making the assertions and the users of the report; there is no opinion provided by the PA. The practitioner must be independent.

57
Q

4 business functions that result in sales transactions and their related documents and records

A
  • processing customer orders
  • granting credit
  • shipping goods
  • billing customers and recording sales
58
Q

5 classes of transactions that comprise the sales and collection cycle

A
  • sales (cash and sales on account)
  • cash receipts
  • sales returns and allowances
  • write off of uncollectible accounts
  • bad debt expense
  • master file changes
59
Q

4 business functions that occur after sales transactions

A
  • process and record cash receipts
  • process and record sales returns and allowances
  • write off uncollectible AR
  • provide for bad debts
  • maintain semi-permanent data
60
Q

6 business functions in a typical human resources and payroll cycle

A
  1. human resources and employment
  2. master file change
  3. acess rights management
  4. timekeeping and payroll preparation
  5. payment of payroll
  6. preparation of T4s and employee withholdings and benefits remittance forms
61
Q

Primary documents and records used in the timekeeping and payroll preparation function

A
  • time record
  • job time record
  • summary payroll report
  • payroll journal
  • payroll master file
  • payroll transaction and history files
62
Q

primary documents used in the payment of payroll function and preparation of payroll tax returns and payment of taxes function

A
  • payroll cheque or direct deposit
  • employee remittance advice
  • T4 form
  • employee withholding sna dbenefits remittance form
63
Q

Risks of error or fraud in the human resources and payroll cycle?

A
  • data-entry errors (eg wage rates, hours worked)
  • late or incorrect provincial/federal payroll remittances
  • incorrect functional allocation of access rights, allowing employees to have unauthorized access to assets
  • inappropriate response to phishing emails revealing access codes that lead to unauthorized access to assets and theft of assets

MGT3160 (4 decks)

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