Test 3 Flashcards
PROBLEM I - MATCH THE ASSERTION:
Management may overstate sales by adding fictitious transactions or inflating actual sales
Occurrence
PROBLEM I - MATCH THE ASSERTION:
Management may fail to recognize the possibility of customer returns
Occurrence
PROBLEM I - MATCH THE ASSERTION:
Not all sales are recorded
Completeness
PROBLEM I - MATCH THE ASSERTION:
Sales have been recorded in incorrect periods
Cutoff
PROBLEM I - MATCH THE ASSERTION:
Accounts Receivable are overstated and do not represent actual sales
Existence
PROBLEM I - MATCH THE ASSERTION:
Not all accounts receivable have been recorded
Completeness
PROBLEM I - MATCH THE ASSERTION:
Receivables are not included in financial statements at the appropriate amount, and valuation adjustments are not recorded properly
Valuation
PROBLEM II: What is Financial Statement Risk?
understatement of payables and expenses; overstatement of net profit
PROBLEM II: What is Assertion Risk?
is there (1) Completeness and (2) Cutoff for both payables and expenses?
PROBLEM II: What are 3 ways to audit the “completeness” of A/P?
- Obtain trial balance of A/P as of balance sheet date and reconcile with G/L
- Search for unrecorded liabilities subsequent to year end
- Reconcile liabilities with monthly statements from creditors
TRUE/FALSE: Fraud is intentionally making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it
TRUE
Are errors intentional or unintentional?
Unintentional
What are the three pieces of the Fraud Triangle?
Motivation
Opportunity
Rationalization
How is fraud prevented?
strong internal controls
What is the #1 internal control?
segregation of duties
What are the relevant assertions in Audit of Cash?
existence and presentation/disclosure
What does “Joint Custody” refer to?
two people opening the mail containing customer receipts (not just one)
What does a Bank confirmation do?
confirm cash balance with financial institutions at year end (REQUIRED PROCEDURE!)
What does a Cutoff Bank Statement detect?
outstanding deposits or checks at year-end and can be compared to the bank reconciliation
What does PBC mean?
prepared by client
Where does the auditor get the client’s bank statement
directly from the bank to the auditor
What is a Financial Statement Risk?
overstatement of revenue and receivables
What are the assertions for Revenue and Accounts Receivable?
Revenue = occurrence
A/R = existence (shown at NRV)
TRUE OR FALSE: Write-offs of accounts or notes receivables should be in writing and approved by management, specifically the treasurer
TRUE
What does confirming accounts receivables with debtors test?
existence
What is a Positive Confirmation asking for and what balances is it used for?
request addressed to debtor asking for a REPLY
used for LARGE balances
*Most often form used
What is a Negative Confirmation asking for and what balances is it used for?
ask debtor to ADVISE the auditors only if the balance shown is incorrect
used for large number of SMALL balances
When is a 3-way match used in the Acquisition and Expenditure Cycle?
recording the asset or expense and related liability
3-way match = “voucher package” (PO, receiving report, and vendor invoice)
How is payment authorized?
by complete voucher package (STAMPED)
Paid to minimize duplicate payment
When is most audit work on A/P performed?
after Balance Sheet date
What is the primary audit objective, other evidence available, and if a confirmation is required for A/P and A/R
A/P = Completeness; External; No
A/R = Existence; Internal; Yes
What is the auditor REQUIRED to communicate with a client’s attorney through?
attorney letter
Why must attorney invoices be reviewed?
for potential contingencies/litigation
Why must Board of Director minutes be reviewed?
for potential contingencies/litigation
What are some risks associated with payroll?
paying fictitious employees
overpaying for time or production
incorrect accounting for costs or expenses
What is the most effective timing of the audit of liabilities?
when performed immediately after the balance sheet date (because concern is with understatements)
