Test 2

Question 1

Revenue Assertions

Answer 1

Existence or Occurence ( 1 )
Completeness ( 2)
Valuation or Allocation ( 1)
Presentation and Disclosure ( 2)

Question 2

Sales Cutoff Testing

Answer 2

Inspecting Documents Prepared before and after balance sheet date to determine that transactions were recorded in the correct period

Question 3

Existence ( Sales Cutoff)

Answer 3

Recorded 12/31 shipped 1/1

Recorded first, so worried about it not existing

Most worried about this assertion when regarding revenue

Question 4

Completeness ( Sales Cutoff)

Answer 4

Shipped out first but not recorded until the next year ( 1/1 ) , so they did not record all transactions inside the year

Question 5

Vouching ( sales )

Answer 5

Mainly focuses on the existence of assertions

• Sales invoice > Bill of Lading > Sales/ Purchase Orders

Question 6

Tracing

Answer 6

Completeness Assertions

• Sales/ Purchase Orders > Bill of Lading > Sales Invoice

Question 7

Cutoff Testing but focused on existence assertion

Answer 7

Extend the period of testing into the year more than just 3 days before ( 1 week before, perhaps)

Question 8

Substantive Test Sales

Answer 8

1. Test the mathematical accuracy of the sales journal and agree to financial statements ( 0 0 0 1 0)
2. Vouch selected entries from the sales journal to source documents ( 1 0 0 2 0 )
3. Trace from Source Documents ( 0 0 1 2 0)
4. Perform Sales Cutoff Testing for Sales and Shipping ( 1 0 1 2 0 )
5. Scan Sales Journal for Large or Unusual Entries ( 1 0 1 1 0 )
6. Recompute quantity X price and tax calculations on invoices. Agree price to the approved price list ( 0 0 0 1 0 )
7. Analytical procedures such as ( +5%, -5% ) ( 1 0 1 1 0 )

Question 9

Receivables Substantive Testing

Answer 9

1. Obtain an Aged Listing of Accounts Receivable from the Client . Foot/ Cross Foot the listing ( 0 0 0 1 0 )
2. Vouch for a sample of debits in the aged listing to supporting documentation ( 1 2 0 2 0 )
3. Confirm a sample of accounts receivable from the aged listing with customers ( 1 2 3 2 0 )
4. Evaluate the client provision for uncollectible accounts receivable (AFDA) ( all valuation)
5. Perform Analytical Procedures for Accounts Receivable ( 1 0 1 1 0 )
6. Evaluate the Overall Presentation of Accounts Receivable in the Financial Statements ( rights obligations 2 , presentation/disclosure 1)
7. Review Subsequent Receipts ( 2 0 0 1 0)

Question 10

Vouching Receivables

Answer 10

Sales Invoice > Bill of Lading > Sales Order

• done internally

Question 11

Evaluate the client provision for AFDA

Answer 11

1 . Recalculate current year - provision for uncollectible accounts and agree to clients trial balance

2. Assess the Reasonable of Provision
3. Vouch a sample of the current year - write-offs to supporting documentation

Question 12

Receivable Confirmations

Answer 12

Addresses Existence / Occurence

Positive ( forces a answer)

Negative ( Only respond if wrong)

Question 13

Positive Confirmations

Answer 13

When to Use - Large Accounts, Weak Controls, Inadequate Attention, May be misstated

Question 14

Subsequent Receipts

Answer 14

The most effective procedure for the existence

Payments received after the balance sheet date are then vouched back to make sure that they actually exist

Question 15

Accounts Receivable Lapping

Answer 15

Concealment of cash shortage by delaying the recording of cash receipts

Happens when a employee has recording and custodial functions

Examines authenticated deposit slips and compare to remittance advice

Question 16

Remittance Advice

Answer 16

Attached is the check that a customer remits to the client.

Verify - Which customer is paying, What bill/invoice the customer is intending to pay

Little 3rd party credibility to this document

Question 17

Which Documents are needed before payment is approved

Answer 17

Purchase Order
Receiving Report
Vendors Invoice ( Purchase Invoice)

The voucher system

Question 18

How Can a firm prevent a duplicate invoice from being paid a second time

Answer 18

Match Documents ( 3 way)

Cancel ( stamp paid ) on the voucher

Question 19

Accounts Payable Substantive Testing

Answer 19

1. Obtain a listing of accounts payable from the client . Foot the listing and agree totals to trial balance ( 0 0 0 1 0 )
2. Vouch accounts payable listing ( 1 1 0 1 0 )
3. Send Accounts Payable Confirmations ( 1 1 1 1 0 )
4. Perform Analytical Procedures for Accounts Payable ( 1 0 1 1 0)
5. Perfom the “ the search “ for unrecroded liabilities ( 0 0 1 0 0 )
6. Evaluate the overall presentation of accounts payable in the financial statements ( presentation / disclosure 1 )

Question 20

Vouching Accounts Payable

Answer 20

Purchase Invoice > Receiving Report > Purchase Order

Question 21

The search

Answer 21

Review Subsequent Disbursements

Review the unpaid Invoice File

Question 22

Accounts Payable Confirmations

Answer 22

Not used often

The largest amount of accounts with the low payables

Since worried about the existence assertion

Question 23

The Search

Answer 23

Look for the differences between the Accounts Payable subsidiary ledger and the Check Register to see if anything is different.

The Suitcase = AP, Closet = Check Register , Bathroom = Unpaid Invoice

Question 24

Substantive Testing Expenditures

Answer 24

1. Perform Purchase Cutoff Tests ( 1 0 1 2 0)
2. Perform Analytical Procedures ( 1 0 1 1 0)
3. Vouch Cash Disbursements ( 2 0 0 2 1)

Question 25

Vouching Cash Disbursements

Answer 25

Cash Disbursements from checkbook ( cash disbursement journal , Voucher register, purchases journal) to vendor invoices

Question 26

FOB destination

Answer 26

The seller is responisble till they reach their destination

Question 27

FOB Shipping Point

Answer 27

The seller hands over the goods when they reach the shipping carrier

Question 28

Purchases Cutoff Schedule

Answer 28

Comparing the Purchases Journal to the Receiving Report

Question 29

Cash Biggest Fear

Answer 29

Overstatement ( Existence)

Question 30

Substantive Testing Cash

Answer 30

1. Obtain a Lead Schedule of Cash Balances from the client . Foot to agree to trial balance ( 0 0 0 1 0)
2. Obtain a Year End Bank Rec
3. Prepare a schedule of interbank transfers ( 1 0 2 0 0 )
4. Perform analytical procedures for Cash ( 1 0 1 1 0 )
5. If control risk is relatively high, prepare a proof of cash ( 1 1 1 1 0 )
6. Count Cash on hand- a company representative should be present, and the auditor should get a signed receipt from the client ( 1 0 0 0 0)
7. Evaluate the overall presentation fo cash in the financial statements ( 0 0 0 0 1 1 )

Question 31

Obtain A Year End Bank Rec for each bank account

Answer 31

A. Confirm the “ Balance Per Bank” ( 1 1 0 2 0 )

B. Verify Reconciling items by obtaining a “ cutoff” or subsequent bank statement

C. Verify the Mathematical accuracy of the reconciliation and agree balance per books ( 0 0 0 1 0 )

Question 32

Verify Reconciling Items by Obtaining “ Cutoff” or subsequent statement

Answer 32

1. Trace Outstanding checks returned with “ cutoff” statement to the client year- end reconciliation ( 1 0 0 0 0)
2. Vouch Outstanding checks from the reconciliation to the subsequent or “ cutoff” bank statement ( check 803) ( 0 0 1 0 0)
3. Vouch Deposits in Transit from the clients year end reconciliation to the subsequent or “cutoff” bank statement ( 10 0 0 0)
4. Agree on other reconciling items from “ cutoff” or subsequent statement to the reconciliation ( 1 0 1 0 0)

Question 33

Bank Victim Kiting

Answer 33

Illegal Practice of writing a bad check on account at one bank , depositing it in a second bank, withdrawing cash .

Beat it by:

Looking for frequent deposits and checks in round amounts
Short lag times between deposits and withdrawals
Low . Avg Balnces vs High - Level Deposits
Large Periodic balances in individual accounts with no apparent business explanation

Question 34

Investors and External Auditors are the victims of the second type of kiting

Answer 34

Business maintains multiple checking accounts. Check drawn from bank A is deposited in Bank B - few days pass before the check clears, meaning there is a double balance since in A & B

Question 35

Proof of Cash

Answer 35

One or more consecutive months of bank reconciliations and all the activity ( checks, deposits, fees ) between those months. This is performed if the control risk over cash is really high.