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Financial Reporting > Chapter 7 - Revenue and Collection Cycle > Flashcards

Chapter 7 - Revenue and Collection Cycle Flashcards

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1
Q

4 basic activities of the revenue and collection cycle

A
  1. receive and process customer order
  2. deliver
  3. bill
  4. receive payment
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2
Q

what sparks the recording or revenue and AR?

A

invoice

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3
Q

3 steps of using the audit risk model

A
  1. set audit risk at the desired level
  2. assess RMM
  3. set detection risk at the significant account and assertion level based on the level of audit risk and RMM
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4
Q

when using the audit risk model, we set the detection risk at the significant account and assertion based on..

A

the level of audit risk and RMM

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5
Q

AS 2110 indicates…

A

The auditor should presume that there is a fraud risk involving improper revenue recognition

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6
Q

3 inherent risks

A
  1. improper revenue recognition
  2. returns and allowances
  3. collectability of receivable
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7
Q

3 types of improper revenue recognition risks

A
  1. cutoff
  2. bill and hold
  3. channel stuffing
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8
Q

bill and hold refers to…

A

recognizing revenue before delivery

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9
Q

channel stuffing refers to..

A

sending more product than the client ordered to inflate sales

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10
Q

sales are typically recorded…

A

net

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11
Q

relevant assertions of revenue

A

occurrence, completness, cutoff

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12
Q

relevant assertions of accounts receivable

A

existence, completeness, valuation

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13
Q

net sales = what assertion?

A

occurance

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14
Q

net AR = what assertion?

A

valuation

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15
Q

revenue is recognized when..

A

good and service are transferred to customers for the amount the company expects to be entitled

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16
Q

revenue is a ____ process

A

top-down

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17
Q

auditors want to ensure revenue is only recorded…

A

once

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18
Q

sec guidance on revenue recognition says what?

A

pervasive evidence that the revenue exists, delivery, sales price is fixed and determinable, and collectability is reasonably assured

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19
Q

5 key revenue and collection cycle key procedures

A
  1. separation of duties
  2. authorization of transactions
  3. access to assets
  4. adequate documentations
  5. undefended check on performance
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20
Q

4 components of authorization of transactions

A
  1. write offs
  2. EDI transactions
  3. credit checks for approval of sale
  4. pricing
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21
Q

adequate documents and records includes…

A

prenumbered sales order, shipping documents, and sales involves, remittance advice

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22
Q

2 components of independent checks on performance

A
  1. AR subsidiary ledger to general ledger
  2. monthly statement to the customer
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23
Q

main goal of auditor is to…

A

have enough support to conclude whether the controls activities are operating effectively

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24
Q

we perform tests of controls because..

A

we must gain sufficient evidence to conclude if control activity is operating effectively

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25
5 test of controls
1. client inquiry 2. inspections of docs 3. walk thoughts 4. re performance 5. observation
26
if controls are not in place or the organization is not performing control effectively, we...
use substantive procedures
27
substantive procedures are determined to see..
if control fails, produce MM in financial statements
28
for cash and its occurance assertion, what test of IC do we use?
vouching of sales
29
for cash and its cutoff assertion, what test of IC do we do?
trace shipping
30
vouching starts where and ends where?
sales invoice, shipping docs
31
tracing starts where and ends where?
shipping docs, sales invoice
32
for the collection cycle, we vouch...
sample of invoices to shipping documents
33
for the collection cycle, we trace...
shipping docs to involves
34
vouching relevent assertion
occurance
35
tracing relevent assertion
completeness
36
vouching moves in what direction?
forward
37
tracing moves in what direction?
backwards
38
to record revenue, you need a _____ match
three way
39
substantive procedures are designed to...
obtain direct evidence about assertions related to a specific balance or transaction
40
controls testing is designed to...
collect evidence of the company's own control activities
41
what assertions are dual purpose?
completeness and occurance
42
a decrease in CR ____ substantive procedures on account balances
recduces
43
a reduction in substantive procedures results in...
audit efficieivences
44
audit efficiency has a ____ sample size
small
45
greater substantive procedures means ____ sample size
larger
46
a decrease in CR creates a ____ in auditors assessment of the RMM in revenue cycle
decreases
47
substantive analytical procedure is used to..
estimate a balance than compare
48
a substantive test of detail is used to...
directly test the transactions that make up an account or estimate
49
confirmation are a substantive ____
test of detail
50
4 steps of auditing accounts receivable
1. test AR aged trial balance 2. confirm balances 3. perform analytical procedures 4. test sales cut off
51
3 categories of analytical procedures for AR
1. sales revenue 2. ADA BDA 3. AR
52
analytical procedures for sales revenue
1. comparisons with previous periods 2. industry comparisons
53
ADA and BDA analytical procedures
1. BDE as a % of sales 3. ADA as a % of gross receivables
54
AR analytical procedures
1. daily sales AR 2. AR turnover
55
confirmation primarily verify what assertion?
existence
56
accounts to be confirmed are documented through the...
aged trial balance
57
4 factors to likely affect the reliability of confirmations
1. previous audit experience 2. recipient of confirmation 3. type of info being confirmed 4. type of confirmation
58
for positive confirmations, a _____ number of accounts are involved
small
59
for positive confirmations, the accounts are _____
larger
60
for positive confirmations, recipient responds if...
the amount is correct or incorrect
61
for negative confirmations, there is a ___ level of RMM
LOW
62
for negative confirmation, what risks are low?
control risk, RMM
63
blank confirmation are used if...
the recipient is likely to return the confirmation without verifying the accuracy of the info
64
only use negative confirmations when...
the RMM is low
65
exception of sending confirmations
1. immaterial 2. sufficient substantive testing 3. low risk of MM
66
what confirmation are the most reliable?
positive and blank
67
recipients are AR confirmation may not report ____ because there is no incentive
underestimates
68
if there is not response for positive and blank confirmations..
you should follow up and perform analytical procedures
69
for no response for negative confirmation...
alternative procedures are not needed
70
sales cutoff procedures are used to...
verify that sales and revenue are recorded in the right period
71
for sales cut off procedures, we should examine...
shipping documents, involves, and returns shortly after YE
72
4 confirmation alternative procedures
1. vouch subsequent cash collections 2. examine shipping docs 3. examine client produced docs 4. inspect correspondance files
73
vouching subsequent cash collection is usually sufficient evidence of what assertions?
existence and valuation
74
4 steps for uncollected accounts
1. inspect files for collectability 2. recalculate BDA and allowance 3. verify reasonableness 4. inspect docs for appropriateness of accounts written off
75
companies reduce CR by having suitable...
operation of authority, custody, recording, and periodic reconciliation duties
76
error checking activities of comparing customer order and shipping documents are important for...
billing customers the correct prices for the delivered quantities
77
the primary substantive audit procedure is..
confirmation
78
confirmations of what accounts are required?
loans, AR and NR
79
confirmation of _______ should not be used as the only evidence of the ownership of assets
AR, NR, and loans receivable
80
confirmation for AR, NR, and loans receivable should not be used as the only evidence of the...
ownership of rights

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