chapters 10 and 11 auditing

Question 1

Revenue Recognition

Answer 1

Revenue is defined as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s major or central operations.

Question 2

Five-Step Approach to Revenue Recognition

Answer 2

Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when the entity satisfies a performance obligation.

Question 3

Types of Transactions and Financial Statement Accounts Affected

Answer 3

1. The sale of goods or rendering of a service for cash or credit.
2. The receipt of cash from the customer in payment for goods or services.
3. The return of goods by the customer for credit or cash.

Question 4

6 Types of Documents and Records

Answer 4

Credit Approval Form
For credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer.

Customer Sales Order
Contains the details of the type and quantity of products or services ordered by the customer.

Cash Receipts Journal
This journal is used to record the cash receipts of the entity.

Shipping Document
This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information.

Sales Invoice
The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price, and the terms of trade.

Sales Journal
Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction.

Question 5

Monitoring of Controls

Answer 5

The auditor must understand how management assesses the design and operation of controls in the revenue process. This understanding should include how supervisory personnel review the personnel who perform the controls and evaluate the performance of the entity’s IT function.

Question 6

In order to
properly set
control risk, theauditor must testcontrols over therevenue process.Such tests may include

Answer 6

Inquiry of client personnel
Inspection of documents and records
Observations of the operation of the control
Walkthroughs
Reperformance of the control activities

Question 7

The level of control risk for the revenue process
can be set using either

Answer 7

quantitative amounts or qualitative terms such as “low,” “medium,” or “high.”

Question 8

Assertions about Classes of Transactions

Answer 8

Occurence
completeness
accuracy/valuation
cutoff
classification
presentation

Question 9

What type of assertion is this: Revenue recorded, good not shipped, or services not performed.

Answer 9

Occurrence

Question 10

What type of assertion is this: Goods shipped or services performed, revenue not recorded

Answer 10

Completeness

Question 11

What type of assertion is this: Goods shipped or services performed for a customer who is a bad credit risk

Answer 11

Authorization

Question 12

What type of assertion is this: Revenue transaction recorded at an incorrect dollar amount

Answer 12

Accuracy

Question 13

What type of assertion is this: Revenue transactions recorded in the wrong period

Answer 13

Cutoff

Question 14

What type of assertion is this: Revenue transaction not properly classified

Answer 14

Classification

Question 15

What type of assertion is this: Revenue transactions not properly presented and disclosed

Answer 15

Presentation

Question 16

Substantive analytical procedures

Answer 16

are used to examine plausible relationships among revenue related accounts.

Question 17

Tests of details

Answer 17

focus on transactions, account balances, or disclosures. Tests of details concentrate on the ending balance for accounts receivable and related accounts as well as related disclosures.

Question 18

Ratios used for comparative purposes include

Answer 18

1. Receivables turnover and days outstanding in accounts receivable
2. Aging categories on aged trial balance of accounts receivable
3. Bad-debts expense as a percent of revenue
4. Allowance for uncollectible accounts as a percent of accounts receivable or credit sales
5. Large customer account balances compared to last period

Question 19

Confirmation

Answer 19

Confirmation is audit evidence that is a direct written response from third parties about the account receivable balance. Confirmation is a good source of evidence about the existence of the accounts receivable. The confirmation process should be controlled by the auditor.

Question 20

Positive Confirmation

Answer 20

Requests that customers indicate whether they agree with the amount due to the client. A response is expected whether the customer agrees or disagrees with the balance indicated.

Question 21

Timing

Answer 21

Accounts receivable may be confirmed at an interim date or at year-end. The confirmation request should be sent soon after the end of the accounting period in order to maximize the response rate.

Question 21

Alternative Procedures

Answer 21

When the auditor does not receive responses to positive confirmations, alternative audit procedures are used. These alternative procedures include:

Examination of specific subsequent cash receipts
Examination of shipping documentation
Examination of other client documentation

Question 22

Negative Confirmation

Answer 22

Requests that the customer respond only when they disagree with the amount due to the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low.

Question 23

Overview of the Purchasing Process

Answer 23

Purchase requisition
Purchase order
Receiving report and liability recorded
Vendor

Question 24

Purchase requisition

Answer 24

request to purchase goods or services

Question 25

Vendor invoice

Answer 25

Vendor invoice – the bill from the vendor.

Question 26

Voucher

Answer 26

serves as the basis for recording a vendor’s invoice

Question 26

Purchase order

Answer 26

includes description, quality, and quantity of goods or services being purchased.

Question 27

Receiving report

Answer 27

records the receipt of goods

Question 28

Voucher register/purchases journal

Answer 28

used to record vouchers for goods and services.

Question 29

Accounts payable subsidiary ledger

Answer 29

includes amount owed to individual vendors.

Question 30

Vendor statement

Answer 30

represents the purchase activity with vendor

Question 31

Check/EFT

Answer 31

pays for goods or services

Question 32

Cash disbursements journal/check register

Answer 32

contains columns to record credits to cash and debits to accounts payable and cash discounts.

Question 33

Functions of the Purchasing Process

Answer 33

Requisitioning purchasing receiving invoice processing disbursements accounts payable general ledger

Question 33

If the results of the tests of controls support the planned level of control risk, the auditor?

Answer 33

conducts substantive procedures at the planned level

Question 34

If the results do not support the planned level of control risk, the auditor

Answer 34

reduces the detection risk, which will increase substantive procedures over the planned level.

Question 35

Audit Assertions about Account Balances, and related disclosures, at the Period End:

Answer 35

Existence. Rights and obligations. Completeness. Accuracy, Valuation and allocation. Classification Presentation

Question 36

All identified misstatements should be aggregated (including any consideration for sampling risk). The projected misstatement is then compared to tolerable misstatement. If the projected misstatement is less than the tolerable misstatement, the auditor has evidence that the account is

Answer 36

fairly presented

Question 37

if the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the account is

Answer 37

not fairly presented