Becker AUD 4.2 - Audit Procedures by Transaction Cycle Flashcards Preview

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Flashcards in Becker AUD 4.2 - Audit Procedures by Transaction Cycle Deck (15):

Audits are generally performed by Transaction Cycle.

Auditing by transaction cycle allows the auditor to find evidence on what 3 items?

(1) Related Accounts
(2) Transactions
(3) Disclosures

all at the same time.
This makes auditing efficient.


What are the 7 transaction cycles in auditing?

Hint: some of these are financial accounts on F/S

(1) Revenue: sales revenue, receivables, and cash receipts

(2) Expenditure: purchases, payable, and cash disbursements

(3) Inventory: Perpetual Inventory, Physical counts, and manufacturing costs

(4) Investments: Investments in debt and equity and Income received from such investments

(5) Property, Plant, and Equipment: Acquisitions and disposals and related Depreciation expense

(6) Payroll and personnel: Payroll (salaried and hourly) and personnel functions

(7) Financing: Debt and equity financing, repayments to borrowers, interest expense, and dividends.


What is the Biggest Audit concern for

overstatement and understatement?

Company overstates: * Revenue and * Assets


Understates: * Expenses and liabilites


Presumption in every audit is that there is the risk of material misstatement due to ____ recognition fraud.



Common revenue frauds include what first 3 of 6 ways of methods to do so?

(1) Recognized revenue early

(2) Holding the books OPEN PAST the close of the accounting period.
* THIS MEANS: Still have books in past period to be altered even when it's past the closing date

(3) Fictitious sales (fake sales)


Common revenue frauds include what NEXT 3 of 6 ways of methods to do so?

(4) Failure to record Sale returns (refunds)

(5) Side agreements used to ALTER sales terms and conditions to include Customers to ACCEPT good and services the otherwise do not need.

* Changing sale agreements where Customers would have to buy additional goods and services, so the company makes more money.

(6) Channel stuffing achieved by convincing distributors to purchase more inventory than they can sell in the near term.

* Company tells its Distributors to buy more of company's inventory, so company supplying this inventory makes more money.


Another common fraud related to revenue cycle is the overstatement of receivable achieved by what 3 methods?

(1) Overstate A/R balances
(2) Report fictitious balances (fake sales)
(3) Understating Allowance for un-collectible accounts


Risks are reduced by segregation of duties.

There are three, what are they?

(1) Authority
(2) Record-keeping
(3) Custody



What are the two problems that can undermine Segregation of duties?

(1) Collusion
(2) Override


(1) Name the 5 segregation of duties used in a Strong Internal controls in handling Sales.

(2) True or False.
A/R is created when the goods are shipped to customer.


(a) Preparation of Sales order (Sales order = internal document with SERIAL NUMBER)

(b) Credit Approval (Valuation assertion; Authority duty by Credit dept to approve credit of Customer to buy item on credit, A/R)

(c) Shipment: (Custody duty) Shipping department creates Serial numbered Bill of lading with copy sent to customer along with

(d) Billing: (record keeping duty) Serial numbered invoice.
Compare shipping document, sales order, and invoices to assure in sending right item to right customer with all prices and discounts computed.

(e) Accounting: (record keeping duty):
* Record sale revenue into sale journal and
* Create A/R at same time.

(2) TRUE
When shipping department sends in the goods, A/R is created on the books


Name the 3 of the 5 components on Internal Control on A/R

(1) Sales: Record receivable in two locations
* A/R control account in General Ledger
* A/R in subsidiary ledger

Independent person reconcile these two records

(2) Collection of Cash payment
* Collect cash = eliminate A/R account

(3) Un-collectible Receivables:
* Create Aging schedule
* Send Aging schedule to Credit dept in collection program.
* At some point - Write off A/R via Get authorization (treasury dept) then someone records the write-off.


Name the last 2 of the 5 components on Internal control on A/R.

(4) Sales Return:
* Examine returned goods to see if it lines up for reason to return it and then give credit to customer
* Use SERIALLY numbered receiving number as Sales return slip.
* APPROVED RETURN = then eliminate A/R

(5) Sales Discounts:
* Review Sales Discount procedures and records to ensure that sales discounts are applied properly and recorded
* This is done to NOT overstate Receivable


(1) List the Steps on the Internal Control on CASH RECEIPTS

(2) True or False:

Cash collections should be restrictively endorsed upon receipt and deposited daily

(3) True or False:

Devices such as a cash registers or lock boxes should not be used as safeguards on cash receipts.

(4) True or False:

If there is no cashier to deposit cash, then it's the Treasurer to deposit the cash.


(a) The person who receives the incoming mail and open it = has NO access to A/R ledger

(b) Receipts be listed in Detail with 1 copy and the Actual Receipts sent to Cashier to prepare the Bank Deposit

(c) Another COPY sent too A/R dept for Entry in A/R subsidiary ledger records

(d) Send 3RD copy to Accounting Dept for entry in GENERAL LEDGER A/R control account.

(e) A/R dept match Details from Bank Deposit ticket with Details from Remittance advices. Do this to find any discrepancies.

(2) True
Cash collections should be restrictively endorsed upon receipt and deposited daily

(3) False
Cash register or lock boxes can be used as safe-guards on cash receipts.

(4) True


On Substantive Procedures on REVENUE CYCLE:

What are the assertions on Auditing accounts receivable?

Hint: Balances assertions

(1) Completeness:
* Trace Aged trail balance on A/R to Total on General ledger account

(2) Valuation, Allocation, Accuracy:
* Accuracy test: Examine confirmations with customers on A/R balance
* Valuation test: test adequacy on Allowance for Un-collectible accounts

(3) Existence and occurrence:
* Confirm a sample of A/R with customers (positive confirmation, negative confirmation, blank form (different positive confirmation-type))

(4) Rights and Obligations:
* Review bank conformations and debt agreements on liens on receivables
* Inquire MGT and Review Debt agreements and board minutes to find A/R factored and sold.

A/R Assertions (balances):


On Substantive Procedures on REVENUE CYCLE:

What are the assertions on Auditing Sales transactions?

Hint: transactions assertions

(1) Completeness:
* Trace shipping documents to sales invoices and to Sales journal and to A/R sub ledger

* Compare Sales invices sample "before" year-end and "after" year-end

with: Shipment dates and Recorded dates on sales in Sales journal

* analyze Sales returns records happened after year-end

(3) Valuation, Allocation, Accuracy:
* Compare prices and terms on Sales invoices sample

with: Authorized price lists and terms of trade

Overall: Determine Sales are recorded at appropriate amount.

(4) Existence and Occurrence:
* Vouch Sales Transaction sample from Sales Journal to Sales invoices to Customer Order and Shipping Documents

Vouch Sales Journal transactions
Sales invoices
Customer Orders & Shipping Documents

(5) Understand-ability and Classification:
* Examine Sales invoice sample to proper classification into Appropriate Revenue accounts