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ACC 4010 - Auditing > Chapter 10 > Flashcards

Chapter 10 Flashcards

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1
Q

What are the key issues/concerns in relation to sales, and what are the respective assertions?

A

That the sales are real and not overstated or understated

Occurrence, completeness, accuracy, and cut-off

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2
Q

What are the key issues/concerns in relation to receivables, and what are the respective assertions?

A

That the receivables exist and are collectible, and that the allowance for doubtful accounts is adequate

Existence and valuation

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3
Q

What are the specific audit objectives related to the occurrence assertion for sales transactions?

A

Sales recorded represent goods shipped to customers during the period
Cash receipts represent cash received from customers during the period
Sales adjustments represent authorized discounts, returns and allowances, and bad debts applicable to the period

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4
Q

What are the specific audit objectives related to the completeness assertion for sales transactions?

A

All goods shipped to customers and cash received from customers, during the period have been recorded
All sales adjustments arising the period have been recorded

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5
Q

What are the specific audit objectives related to the accuracy assertion for sales transactions?

A

All sales, cash receipts and sales adjustments are accurately recorded

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6
Q

What are the specific audit objectives related to the cut-off assertion for sales transactions?

A

All sales, cash receipts and sales adjustments are recorded in the correct period

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7
Q

What are the specific audit objectives related to the classification, presentation and disclosure assertion for sales transactions?

A

All sales, cash receipts and sales adjustments are recorded in the correct accounts and appropriately presented
All required disclosures and included in the FS

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8
Q

What are the specific audit objectives related to the existence assertion for receivables transactions?

A

AR recorded represent amounts owed by customers

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9
Q

What are the specific audit objectives related to the rights and obligations assertion for receivables transactions?

A

AR represent legal claims against customers for payment

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10
Q

What are the specific audit objectives related to the Completeness assertion for receivables transactions?

A

All amount owing by customers are recorded in AR

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11
Q

What are the specific audit objectives related to the Valuation assertion for receivables transactions?

A

AR represent gross claims against customers and the allowance for doubtful accounts represents a reasonable estimate of the difference between the gross claims and their NRV

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12
Q

What are the specific audit objectives related to the classification, presentation, and disclosure assertion for receivables transactions?

A

AR are recorded in the correct accounts and appropriately presented
All required disclosures are included in the FS

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13
Q

What does the sales and receivables cycle function involve?

A

Accepting customers orders and credit approval
Shipping goods
Invoicing customers
Recording sales

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14
Q

What documents support the occurrence assertion in the sales and receivables cycle?

A

A completed customer order form or a submitted purchase order request, which provide evidence of the authenticity and legitimacy of the sale.

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15
Q

How is the completeness assertion supported in the processing of customer orders?

A

By using pre-numbered multi-copy sales order forms, which help ensure all accepted orders are recorded and none are omitted.

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16
Q

What is the purpose of the sales order form in the sales process?

A

It records accepted customer orders, indicates credit approval, and serves as authorization for shipment.

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17
Q

What is reviewed before a customer order is accepted?

A

The terms and conditions of the sale and the availability of inventory.

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18
Q

Why are multi-copy sales order forms used in the sales process?

A

To ensure that all departments (e.g., sales, shipping, billing) have consistent, authorized information and that each order is processed completely and accurately.

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19
Q

Which audit assertion is supported by using pre-numbered multi-copy sales order forms?

A

Completeness — pre-numbering helps ensure all customer orders are recorded and tracked, preventing omissions.

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20
Q

How do multi-copy sales order forms function as an internal control?

A

They help verify that orders are approved, inventory is available, and shipping and billing are carried out only for valid, authorized sales.

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21
Q

Why is a credit check performed before forwarding a sales order to the shipping department?

A

To ensure the customer is creditworthy and to minimize potential credit losses.

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22
Q

Which audit assertion is supported by strong controls over credit approval?

A

Valuation — to ensure accounts receivable are collectible and not overstated due to unapproved or risky credit sales.

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23
Q

When should goods be shipped to customers?

A

Only after an approved sales order is received by the shipping department.

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24
Q

What segregation of duties should exist in the shipping process?

A

Individuals who approve sales orders should be separate from those responsible for inventory custody and shipping, to prevent unauthorized shipments.

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25
What document is used to record the shipment of goods, and what assertions does it support?
A pre-numbered multi-copy shipping document (or bill of lading) supports the occurrence, completeness, and cut-off assertions.
26
What is the purpose of the bill of lading in the sales process?
It updates inventory records, initiates invoicing, and provides proof of shipment to the customer (original copy sent to the customer).
27
How does the shipping document support the cut-off assertion?
It provides evidence of when goods were shipped, helping ensure that sales are recorded in the correct period.
28
What assertion does the shipping document support?
Cut-off, completeness, and occurrence assertion
29
What is the shipping document also referred to as?
The bill of lading
30
When should a sales invoice be sent to the customer?
After goods are shipped, and a copy should be kept by the invoicing department.
31
Why should shipping and invoicing functions be segregated?
To prevent unauthorized shipment and billing of goods to customers.
32
What documents should be matched before preparing a sales invoice?
The shipping document should be matched with the sales invoice to ensure accuracy and completeness.
33
What assertions are supported by controls in the invoicing process?
Completeness (all goods shipped are invoiced) and accuracy (amounts and pricing are correct).
34
What is the purpose of control totals in the sales recording process?
To ensure that all sales invoices are recorded and posted accurately and completely.
35
What should be done when a sales invoice number is missing?
It should be investigated and followed up to ensure no transactions are unrecorded or lost.
36
What is the purpose of sending regular customer statements?
To allow customers to confirm balances, helping detect any errors or potential fraud in receivables.
37
Who should review overrides or changes made to master data in online systems?
Someone independent of the process, to maintain proper segregation of duties and oversight.
38
What are the functions involved in the cash receipts process?
Receiving cash Depositing cash in the bank Recording cash receipts
39
What is a key risk with cash receipts?
That cash is stolen by employees before it is recorded
40
What is used to minimize the risk of cash theft for cash sales?
A cash register / point-of-sale system
41
What is the preferred method of payment and why?
Most entities prefer credit or debit card despite the commission percentage
42
What are some control measures you can put into place with cash receipts?
Reconcile the daily card sales with cash register total (daily reconciliation) 2 clerks responsible for opening mail, payment by cheque All cheques received should be stamped for deposit Posting of cash receipts to individual customer accounts & recording of cash receipts should be segregated to prevent theft
43
What are common types of sales adjustment transactions?
Cash discounts Sales returns and allowances Bad debt write-offs
44
What is the primary fraud risk related to sales adjustments?
Fictitious sales adjustments may be used to conceal theft of cash receipts, such as overstating returns or writing off accounts fraudulently.
45
What are two common ways employees might use sales adjustments to conceal cash theft?
Writing off a customer’s account fraudulently Overstating sales returns or cash discounts
46
Why are sales adjustments considered high-risk, even if their volume is low?
Because errors and irregularities in these transactions can be significant and often used to commit or conceal fraud.
47
What should auditors focus on when reviewing sales adjustments?
Unusual or excessive returns/discounts/write-offs Proper authorization of adjustments Segregation of duties and supporting documentation
48
What control helps reduce the risk of fraud in bad debt write-offs?
Requiring senior management approval for all bad debt write-offs.
49
What key segregation of duties helps prevent fraud in sales adjustments?
Separate individuals should handle cash receipts and authorize sales adjustments.
50
What documentation should support sales adjustments like returns and bad debt write-offs?
An approved credit memo or similar formal document.
51
Why are controls over sales adjustments important?
To prevent fictitious adjustments used to conceal fraud, such as cash theft or unauthorized discounts.
52
What are three important controls over sales adjustments?
Authorization (senior manager approval) Segregation of duties (cash handling vs. adjustment approval) Supporting documentation (e.g., credit memos)
53
Why must auditors carefully assess the sales and receivables cycle?
Because these areas are material for most entities and prone to material misstatement.
54
How does the auditor begin assessing risk in sales and receivables?
By obtaining an understanding of the entity and developing expectations for sales, gross margin %, and receivables levels.
55
What are three analytical procedures auditors perform when auditing sales and receivables?
Trend analysis of sales and bad debts Gross margin analysis Turnover ratio calculations (sales and receivables)
56
What should an auditor do if actual financial statement amounts differ from expectations?
Consider it a risk indicator, and perform specific procedures to address the potential misstatement.
57
What is the main purpose of performing analytical procedures in the planning phase?
To identify areas of potential misstatement and direct audit focus.
58
What is a common pressure-driven risk that affects revenue reporting?
Overstating sales to meet sales or profit targets — often through fictitious sales or cut-off errors.
59
Why might management overstate receivables or understate the allowance for bad debts?
To improve working capital ratios or avoid going-concern issues.
60
Why is revenue recognition considered an inherent risk?
Because it may involve complex or contentious accounting issues, especially with related party transactions.
61
How does transaction volume contribute to inherent risk in this cycle?
High volume of sales, cash receipts, and adjustments increases the chance of errors.
62
How can sales adjustments be used to commit fraud?
They can be used to conceal theft of cash receipts by writing off or adjusting customer accounts fraudulently.
63
What does inherent risk refer to in the context of auditing?
The susceptibility of an assertion to a material misstatement before considering internal controls.
64
How does the control environment affect the audit of sales, receivables, and cash receipts?
It can enhance or negate the effectiveness of internal controls, influencing control risk assessment.
65
How does management’s ethical tone reduce audit risk?
Strong integrity and ethical values reduce the risk of employee fraud and fraudulent financial reporting.
66
When can an auditor adopt a combined audit strategy for sales and receivables?
When controls are effective and control risk is assessed as low.
67
Is the decision to test controls made for each assertion or for the entire account?
Separately for each assertion.
68
Which direction is used for testing the occurrence assertion?
Backwards (vouching) – from sales journal to supporting documents.
69
How do you test the occurrence assertion for sales?
Vouch from sales journal entries to sales orders and shipping documents.
70
How do you test the completeness assertion for sales?
Trace from sales orders or shipping docs to the sales journal to ensure everything was recorded.
71
What are dual-purpose tests?
Tests that provide both control testing and substantive evidence (e.g. accuracy of amounts).
72
When evaluating dual-purpose tests for control effectiveness, what matters more: size or number of errors?
The number of control deviations, not the size of misstatements.
73
What direction should testing be for occurrence assertion and completeness assertion?
Assertion: vouching (accounting records --> source documents) Completeness: tracing (source documents --> accounting records)
74
How does the auditor determine the acceptable level of detection risk?
By considering the combined assessment of inherent and control risks for each assertion.
75
How does detection risk affect substantive procedures?
It influences the nature, timing, and extent of the procedures performed.
76
What role does professional judgment play in planning substantive procedures?
The auditor must use professional judgment to set detection risk and tailor procedures for each assertion.
77
When might the auditor revise their substantive procedures?
If controls testing results show that control effectiveness differs from what was expected.
78
What are substantive procedures?
Audit procedures designed to detect material misstatements in the financial statements.
79
How does the auditor verify opening balances for receivables and related allowances?
By tracing them to the prior year’s working papers.
80
What is the purpose of performing analytical procedures during the audit of receivables?
To identify unexpected fluctuations and obtain corroborating explanations.
81
What does vouching sales and receivables to supporting documents test?
The occurrence assertion and potentially also serves as part of a dual-purpose test.
82
Why are cut-off tests performed on sales and cash receipts?
To ensure transactions are recorded in the correct accounting period (cut-off assertion).
83
What is a common substantive procedure for testing accounts receivable existence?
Sending confirmations to customers.
84
How does the auditor evaluate the adequacy of the allowance for doubtful accounts?
By assessing management’s estimate, historical trends, and subsequent collections — testing the valuation assertion.
85
What do confirmations provide evidence for and what do they not provide evidence for?
They provide evidence for the existence and rights and obligation assertions They do not support the completeness assertion
86
What assertions are addressed by confirming accounts receivable?
Existence and rights & obligations — but not completeness.
87
What is the difference between positive and negative A/R confirmations?
Positive: Customer must respond whether balance is correct or not. Negative: Customer only responds if balance is incorrect.
88
When are A/R confirmations commonly used?
When balances are material and customer responses are likely.
89
How does the auditor maintain control over confirmations?
By mailing confirmations directly and receiving responses directly, without client involvement.
90
What must the auditor do if there is no response to a positive confirmation?
Perform alternative procedures, such as reviewing subsequent cash receipts or vouching unpaid invoices.
91
What is the best alternative procedure when a confirmation is not returned?
Reviewing subsequent cash receipts — gives strong evidence of existence and collectability.
92
What are the two components of the allowance for doubtful accounts?
Specific allowance – for known customers with financial issues or disputes. General allowance – % of overdue balances beyond a certain time.
93
What type of accounting item is the allowance for doubtful accounts?
An estimate prepared by management.
94
Which audit assertion is most relevant when auditing the allowance for doubtful accounts?
Valuation
95
How does the auditor assess the assumptions used in calculating the allowance?
By evaluating whether the assumptions are reasonable given the client’s historical data and current circumstances.
96
Why does the auditor review the aged accounts receivable listing?
To verify the reliability of the data used in the general allowance calculation.
97
Why does the auditor consider prior year’s allowances when evaluating the current one?
To assess the consistency and reasonableness of management’s estimation practices over time.
98
What basic check does the auditor perform on the allowance calculation?
Verify the mathematical accuracy of the estimate.

ACC 4010 - Auditing (14 decks)

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