Study Unit 11: questions Flashcards
An auditor is required to confirm accounts receivable if the accounts receivable balances are
Material to the financial statements.
Confirmation of accounts receivable is a generally accepted auditing procedure. The auditor should confirm accounts receivable unless:
(1) they are immaterial,
(2) confirmation would be ineffective, or
(3) the RMM based on other procedures is judged to be sufficiently low.
A cutoff test of sales complements the verification of
Accounts receivable.
A purpose of a sales cutoff test is to obtain assurance that receivables are recorded in the appropriate period. Failure to observe a proper cutoff is a means of manipulating sales for the period under audit.
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would?
Send the customer a second confirmation request.
When first requests for positive confirmation are not returned, the auditor should consider second requests. The requests should be authorized by the client and should ask the debtor to respond directly to the auditor.
Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to
Expand tests of collectibility.
When customers fail to answer a second request for a positive confirmation, the accounts may be
in dispute, uncollectible, or fictitious. The auditor should then apply alternative procedures (examination of subsequent cash receipts, shipping documents, and other client documentation of existence) to obtain evidence about the validity and accuracy of significant nonresponding accounts.
An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
Dates checks are deposited per bank statements with the dates remittance credits are recorded.
Lapping involves recording current cash payments on accounts receivable as credits to prior customers’ accounts to conceal a theft of cash. Comparing the date that a customer’s check was deposited with the date a record was made to reduce the balance determines whether the deposit was made prior to the recording date.
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end?
Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.
What is lapping and how do you detect it?
Lapping involves recording current cash payments on accounts receivable as credits to prior customers’ accounts to conceal a theft of cash. Comparing the date that a customer’s check was deposited with the date a record was made to reduce the balance determines whether the deposit was made prior to the recording date.
The standard AICPA form directed to financial institutions requests what kind of information?
- Interset rate of a direct liability
- Description of collateral for direct liability
- Due date of a direct liability
- Date through which interest is paid
*it does not ask for principal amount paid on a direct liability, because the auditor is not concerned with the amount of liability already paid*
The best evidence regarding year-end bank balances is documented in the
Bank reconciliations.
A bank reconciliation verifies the agreement of the bank statements obtained directly from the institution and the amount of cash reported in the financial statements. These amounts should be equal after adjustment for deposits in transit, outstanding checks, bank charges, etc. Thus, a bank reconciliation documents direct (primary) evidence of the year-end bank balance.
When auditing a client’s statement of cash flows, an auditor will rely primarily upon
Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.
The statement of cash flows represents balances taken from the other statements as well as analysis of changes in those balances. Consequently, this statement is audited in conjunction with the balance sheet and income statement accounts.
When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent
Substitution.
Simultaneous verification of cash and cash equivalents, such as negotiable securities, is common practice to avoid the possibility of conversion of negotiable assets to cash to conceal a cash shortage. The auditor should control and verify all liquid assets at one time.
