SU 11: Evidence -- Sales- Receivables-Cash Cycle Flashcards
1.) Auditor reviewed delinquent customers’ credit ratings
a. C, valuation and allocation – considering delinquent accounts and credit ratings relates to the valuation of A/R
2.) The auditor confirmed accounts receivable
a. D, Existence - Confirmation is the primary test of existence
3.) The auditor tested sales transactions at year end to determine that they were recorded in proper period
a. F, Cutoff – Evaluating transactions for the recording in the proper accounting period at year end tests cutoff
4.) The auditor accounted for the numerical sequence of sales orders
a. A, Completeness – Accounting for all documents in a sequence is a test of completeness
5.) The auditor vouched the recorded A/R to shipping documents
a. D, Existence – Vouching is a primary test of existence
6.) The auditor determined that A/R was presented on the BS as a current asset
a. E, Classification and Understandability – Considering the presentation of items on the balance sheet is a test of classification
7.) The auditor aged the A/R
a. C, valuation and allocation – Again of A/R to consider collectability relates to the valuation assertion
8.) The auditor inquired of management about possibility that receivables had been sold or factored
a. B, Rights and Obligations – The possibility of factoring receivables relates to ownership issues
9.) The auditor reconciled the total receivables from the subsidiary ledger to the balance on the GL
a. A, Completeness – Reconciling the subsidiary ledger with the GL helps determine if transactions failed to be recorded
10.) The auditor determined that a note was included describing any sales to related parties
a. E, Classification and Understandability – Disclosures in the notes to the f/s relate to the understandability assertion
Audits of Cash will generally require
High level of assurance
Will generally use a test of balance approach
Cash - R and O
Management asserts that cash reported on the balance sheet belongs to the client. Use bank confirmation
Cash Valuation
Management assets cash is reported on balance sheet in correct amount - confirm with bank, compare confirm with reconciliation, examine interbank transfers schedule
Cash - E and O
Management asserts balance sheet amounts actually exist. Confirm with bank, observe cash on hand count, examine certificates of deposit
Cash - Cutoff and Completeness
Management asserts that all cash on balance sheet has been reported in appropriate period. Compare DIT to cutoff statement. Reconcile cutoff statement
Cash - P and D
Management asserts cash is properly classified and and any pertinent information is disclosed
Evidence related to AR
Common tool is confirmation both positive and negative
Positive Confirmations are
Require response from customer indicating agreement or disagreement with amount indicated by client
Positive Confirmations are used when
Relatively low number of accounts with relatively high balance
Acceptable detection risk is low
Customer may be unlikely to respond
Negative confirmation are
requires response only when customer disagree with balance
Negative confirmations are used when
relatively high number of accounts with relatively low balances
AR - R and O
Company asserts that they are entitled the amounts reported in AR.
Examine loan agreements for A/R Financing
Examine BOD minutes
Inquire of management
AR - Valuation
AR is reported at net realizable value
Confirm balances
Recalculate balances of allowance for uncollectible accounts
AR-Cutoff & Completeness
Management asserts that all amounts resulting from sales on account are included in AR and are reported in the appropriate period
Compare shipping documents to recorded sales
Examine pre-numbered ship docs to invoices to make certain that all numbers are accounted for
Examine ship logs and ship docs at or near ye for proper cutoff
AR - E and O
AR amounts exist and sales actually occurred
Confirm AR
Compare sales docs to invoices to determine goods shipped
Compare deposits to dates receipts were recorded to verify absence of lapping
AR - P and D
Management asserts that amounts reported as sales and AR properly classified and disclosed
Examine loan agreements (pledging)
BOD minutes for AR financing
Inventory - R and O
Management asserts company owns inventory reported and that is has not been pledged.
Inventory R and O - Testing
- Inquire about consignments and inventory pledged as security
- Examine loan agreements
- Examine purchase invoices to verify inventory is owned rather than consigned
- Examine BOD minutes - inventory financing
Inventory - Valuation
Inventory is properly reported using appropriate inventory valuation method
Inventory Valuation - Testing
- Inquire about valuation method used
- Compare amounts resulting from test counts to amounts reported on inventory schedule
- Compare inventory cost to amounts on invoices
- Compare totals on inventory schedules to amounts on balance sheet
- Compare amounts from cost sheets to amounts for manufactured inventory
- Observe counts of inventory to verify accuracy
- Recalculate selected amounts and totals to on inventory schedules using cost and quantity
- Examine cost sheets for proper handling of DM, DL, and application of OH
Inventory - Completeness and Cutoff
All inventory is owned by the company and the inventory is reported in the proper period.
Inventory Completeness and Cutoff - Testing
- Inquire of management as to inventories stored outside the entity
- Confirm inventories held by consignee, warehouses
- Compare amounts from test counts to inventory schedules
- Compare totals of inventory schedules to amount reported on balance sheet
Inventory - E andO
Management asserts that all inventory that is reported in the financial statements actually
exists
Inventory E and O - Testing
- Confirm inventories held by consignees, public warehouses, and others outside the entity
- Observe the counting of inventory
- Examine shipping documents for inventory in transit
Inventory P and D
Management asserts that amounts reported as inventory in the financial statements are
properly classified and any pertinent information has been adequately disclosed
Inventory P and D - Testing
• Inquire of management if inventory is pledged as security for a loan
• Examine loan agreements for indication of financing of inventory
• Examine financial statements and disclosures to make certain that inventory is properly
presented and components and inventory valuation method are properly disclosed
• Examine minutes of directors meetings for indications of inventory financing
