Ch 6 And 7 Class Notes Flashcards Preview

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Flashcards in Ch 6 And 7 Class Notes Deck (65):
0

Lack of separation of duties causes...

Weak internal controls

1

White collar crime

Committed by management

Management can override controls

2

What heightened awareness of fraud?

SOX

3

Fraud prevention

Segregation of duties

4

Collusion

2 people agree to rip off company

5

3 questions auditor should ask employees about code of conduct

1 does it exist?
2 is it enforced?
3 do you know what's in it?

6

Job description

Responsibilities of position

Good internal control

7

Forced vacation

Example of internal control

8

What control should organization have in place going into next year?

Budget

9

What should you do when you receive order without a packing slip?

Have receiving employees count items received

10

Lapping

Employee steals payment and applies second payment to first
Account

11

Where does the auditor trace the deposit slip?

To the bank account

12

Audit trail includes? 3 things

1 Receipt of cash
2 custody over it
3 deposit into bank

13

Observation of controls is...

Not enough for assessment

14

Restrictively endorsed

FDO = for deposit only

15

Voucher packet

All supporting documentation to support writing a check

Ex. Copy of receiving report, copy of invoice from vendor

16

Vouching is a typical...

Staff accountant job

17

How does auditor find out who authorized signers are?

By asking client

18

Checks prenumbered and accounted for

In bank statements or in transit

19

Bank reconciliation

Difference between account balance and bank statement

Transactions client only knows about that bank doesn't know and
Vice versa

Ex. Outstanding checks, company doesn't know about interest received in bank account

20

Footed

Added up

21

Payroll balance = 0, why?

Because impressed account

Tracks how much deposited and taken out

22

Check kiting

Cash appears in 2 places at once, matter of timing

Less of problem because updated instantaneously online

Ex. Move $100 from account A to account B and both accounts
Show the $100

23

Proof of cash is usually used for...

Smaller clients

24

Risk of cash business: completeness

Can't audit cash that's not been recorded

25

Order of revenue and collection cycle 4 things

1 customer order
2 grant credit
3 ship goods
4 record transaction

26

Entry to allowance for doubtful accounts

Bad debt exp. xxx
Allowance for doubtful accts. xxx

27

What period is bad debt expense effective?

Effective during period of entry

28

Matching principle

Try to match revenues with expenses

29

3 types of confirmations auditor sends out

1 positive confirmation
2 negative confirmation
3 blank confirmation

30

How do you make sure receivables are collectible at year end?

Link cash payment in January with A/R balance at year end

31

Confirms get mailed back to...

Auditor

32

What do inherent risks related to revenue and collection cycle focus on?

Improper revenue recognition

33

Plausible Reasons gross profit may fall

1 input prices rise without passing cost to customer
2 increased competition decreases sales price, while cost stays
The same
3 drop most profitable product line

34

Dropping the most profitable product line is an example of

Product mix change

35

When a client gives an inaccurate answer (ex. "Gross profit decreased because sales price increased") what should you ask client?

"Can you explain this?"

36

What is it good to compare analytics too?

Budget/forecast

37

Who sets control risk?

Auditor

38

What is an example of an account that naturally has low inherent risk?

Allowance account

39

You must get more evidence when detection risk is...

Low

40

You can get less evidence when detection risk is...

High

41

Is detection risk mentioned in the audit report?

No

42

3 example of improper revenue recognition

1 cutoff
2 bill and hold
3 channel stuffing

43

3 inherent risks in revenue and collection cycle

1 improper revenue recognition
2 returns and allowances
3 collectibility of receivables

44

Bill and hold example

Bill customer with standing order in January in December

Don't ship inventory until January

45

FOB Destination

Title doesn't transfer to customer until reaches customer

46

What do you need to make a 3rd party give a false confirmation?

Collusion

47

Monthly statement

Statement of customer balances

48

How can a client show auditor evidence that an account on an aged trial balance is still collectible?

Show documented correspondence between client and customer

49

Earnings management: allowance for doubtful accounts

In good year overstate allowance for doubtful accounts

and Decrease it in lean year while decreasing bad debt exp.
Thus increasing earnings

50

When testing occurrence vs. Completion, one must...

Test in opposite direction

51

Completeness test

Trace from shipping documents to sales journal

52

Occurrence test

Vouch from sales journal to shipping document

53

Is revenue recognized during earnings management of allowance for doubtful accounts?

No

54

Customer tracks balances by voucher/invoice

Get slow response time for confirmation

55

60% coverage of $1,000,000 A/R means?

$600,000 A/R confirmed

56

Blank confirmation

Auditor doesn't fill in balance amount when sends to customer

57

When should auditor use blank confirmation?

When recipient is likely to return positive confirmation without
Verifying accuracy of information

58

What is a positive confirmation sent on?

Who is it sent too? Who is it returned too?

Sent on clients letterhead to customer

Returned to auditor

59

What should an auditor do when they send out a positive confirmation and don't hear back?

Need to follow up with customer by phone or email

And document response

60

Subsequent cash receipt

Customer paid client after December 31st

61

If you receive a confirm and there's a difference in balance you should...

At least document difference as immaterial or follow up

If you do nothing this is sloppy auditing

62

Client representation letter AKA Management Representation Letter
When is it written? What does it include? 3

1 signed at end of audit
2 signed by management
3 letter states management has given every bit of info auditor
Asked including related party transactions

63

Why might the days sales ratio increase?

Because client loosened credit policy

64

Higher sales in January may be caused by what?

Channel stuffing