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Quiz 4 Flashcards

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1
Q

Five business processes / transaction cycles

A

-Revenue
-Purchasing
-Human resource management
-Inventory management
-Financing

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2
Q

What are the two main processes that affect the financial statements?

A

Revenue and Purchasing

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3
Q

Four Criteria for recognition

A

-Persuasive evidence of an arrangement exists
-Delivery has occurred or service rendered
-Seller’s price to buyer is fixed or determinable
-Collectibillity is reasonable assured

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4
Q

Ways in which receivables are overstated:

A

-Overstating balances
-Reporting fictitious balances
-Understating the allowance for uncollectible accounts

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5
Q

Documents and Records included in the Revenue Process:

A

-Customer sales order
-Shipping Document
-Sales invoice
-Sales Journal
-Accounts receivable subsidiary ledger
-Aged trial balance of accounts receivable
-Cash receipts journal

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6
Q

Customer sales order (or customer purchase order)

A

Contains the detail and quantity of products/services ordered by the customer (may include part #, price, description, quantity, when the parts are due) aka customer purchase order (or PO), evidence that sale was ordered

This is a KEY SOURCE DOCUMENT

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7
Q

Shipping documents / Bill of lading

A

Prepared anytime goods are shipped to the customer
Bill of lading includes: product shipped, part #, description, units shipped ….
Copy sent to customer, copy used to initiate billing
This is a KEY SOURCE DOCUMENT
Evidence that product was shipped / sale completed

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8
Q

Sales invoice

A

Document used to bill the customer
Contains information: type of product / service, quantity, price, terms of trade
Document signals revenue recognition (earned and realized)
KEY DOCUMENT

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9
Q

Sales journal

A

Accounting journal used to track sales made on credit. Once sales invoice issued, the credit sales are recorded in the accounting records.
Information includes (sales, product sold, business line…)
Summarizes credit sales activity (KEY ACCOUNTING REPORT)
Sales journal balance should equal General Ledger (G/L) Balance

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10
Q

Accounts receivable subsidiary ledger

A

Contains account and detail of transactions for each customer (invoice, date shipped, quantity, price, total sales) (again should tie to the G/L)

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11
Q

Aged trial balance of accounts receivable

A

Normally prepared weekly, monthly summarizes all customer balances in the accounts receivable ledger
Customer balances are reported in aging categories
Used to monitor collections
This is KEY ACCOUNTING REPORT
Auditor likes this report – good detail information
This report may used extensively by a company

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12
Q

Cash receipts journal

A

Journal used to record the entity’s cash receipts
Records cash sales (column: debit cash, credit sales)
Records receipt of cash: debit cash, credit sales, credit accounts receivable, other income etc…..
Updates subsidiary ledgers
Credit sales are recorded in the sales Journal
Document flow: source document to journal to subsidiary ledger to G/L, T/B, FS

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13
Q

What three job should always be kept seperate?

A

Cash receipts, Accounts receivable, and General Ledger

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14
Q

Occurence

(identify assertion, possible misstatement, control activity and test of control)

A

All revenue transactions that have been recorded have occurred

(OVERSTATEMENT)

Segregation of duties

Vouch Sales Journal to sales invoices to bill of lading (shipping document)

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15
Q

Completeness

(identify assertion, possible misstatement, control activity and test of control)

A

all revenue transactions that should have been recorded are recorded

(UNDER STATED)

Accounting for numerical sequence of shipping documents and sales invoices

Trace sample of shipping documents (aka – Bills of Lading) to sales invoice and sales invoices to sales journal

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16
Q

Authorization

(identify assertion, possible misstatement, control activity and test of control)

A

all revenue transactions are properly authorized

Make sales at unauthorized prices or terms

Authorized price list and terms of trade reduces risk of inaccuracies

Review sales orders for evidence of proper review and approval

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17
Q

Accuracy

(identify assertion, possible misstatement, control activity and test of control)

A

Amounts and other related data for sales transaction are properly recorded

Revenue recorded at an incorrect dollar amount

Authorized price list and terms of trade

Recalculate/recompute information for a sample of sales invoices

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18
Q

Cutoff

(identify assertion, possible misstatement, control activity and test of control)

A

All revenue has been recorded in the proper accounting period

Sales may be recorded in the wrong accounting period

Daily billing of goods shipped

Compare date of sales invoices to dates of relevant shipping documents

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19
Q

Classification

(identify assertion, possible misstatement, control activity and test of control)

A

All revenue is recorded in the proper account

Sales may be recorded in the wrong accounting period unless proper controls are in place

Use of chart of accounts

Review sales journal and general ledger for proper classification [Chart of Accounts]

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20
Q

Substantive Tests for Sales:

A

-Occurence
-Accuracy
-Cutoff

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21
Q

Key assertion for allowance for doubtful accounts:

A

Valuation

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22
Q

Key assertion for accounts receivable:

A

Existence

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23
Q

How to test for completeness of accounts receivable

A

Trace shipping documents to sale invoice to sales journal and AR subsidiary ledger

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24
Q

How to test cutoff for accounts receivable

A

Test a few shipping documents just prior to year-end and test a few shipping documents just after year-end

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25
Positive Confirmation
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 Sometimes request customer to provide amount owed to the client
26
Negative Confirmation
Requests that the customer respond only when they disagree with the amount due to the client Used when the client has many small account balances and control risk is assessed as low Not as reliable as customers may not agree with balance but still do not send a reply
27
What to do if confirmation is not returned
Auditor must still audit these balances. They could do the following: 1. Send Second Confirmation 2. Vouch account balance to sales invoices and sales invoices to bill of ladings (inspection of documents) 3. Review subsequent cash receipts for payment. Suppose auditor is auditing YE balance (say at 12/31). They could review cash receipts after 12/31 to see if the receivable they are trying to confirm has been paid. If paid then balance is obviously good
28
Expenses are categorized into 1 of 3 categories:
1. Product Costs 2. Period Costs 3. Systemic Allocated Costs
29
Product Costs
Costs used to create a product (Ex. COGS)
30
Period Costs
Expenses recognized during the period in which cash / liability is incurred. (Ex. advertising, selling, rent, administrative salaries)
31
Systemic Allocated Costs
Allocate expenses by systematic or rational procedures to the period during which the related assets are expected to provide benefits (Ex. depreciation of fixed assets, amortization)
32
Purchasing Process
1. Begins with a Purchase Requisition [PR] generated by the user department that goes to purchasing departments 2. The purchasing department prepares a purchase order that is sent to the vendor. 3. When the goods are received or the services rendered (receiving report), a liability is recorded. 4. Vendor invoice received and matched with PR, PO, RR (3 way match)
33
Invoice + PR + PO + RR =
liability (accounts payable) recognized ---- payment voucher
34
Purchase requisition
Request to purchase goods or services (source document) Starts the process
35
Purchase order
Includes description, quality, and quantity of goods or services being purchased (source document) PO performed by purchasing, send to supplier
36
Receiving Report
records the receipt of goods (source document)
37
Vendor invoice
The bill from the vendor (source document)
38
Voucher
Serves as the basis for recording a vendor’s invoice
39
Voucher 3 way match
Voucher = PO + RR + Invoice Initiates recording of liability
40
Liabilities vs Receivables for risk
Liabilities are much less at risk to be manipulated and tests are used less frequently.
41
Contingent liability
A potential liability that may occur, depending on the outcome of an uncertain future event
42
Contingent liability likelihood that future event will result in a loss is assessed using three categories:
1. Probable: the future event is likely to occur (likely to occur) 2. Reasonable possible: the chance of the future event is more than remote but less than likely 3. Remote: The chance of the future event is slight (slight chance)
43
A contingent liability must meet two conditions to be recorded as liability and expense
1. Probable – the future event is likely to occur 2. Estimable – the amount of the loss can be reasonably estimated
44
Remote =
No footnote disclosure
45
Reasonably possible =
footnote disclosure
46
Reasonably possible + estimable =
footnote disclosure (no accrual)
47
Probable + can’t estimate =
footnote disclosure
48
Probable + estimable =
Accrual
49
How to Identify/Audit Contingent Liabilities DURING the audit
Inquiry, confirmation and inspection of documents
50
How to Identify/Audit Contingent Liabilities near END of the audit
1. Inquiry of management regarding entity’s policies and procedures for identifying, evaluating and accounting for contingent liabilities 2. Examine documents in the entity’s records 3. Obtain LEGAL LETTER that describes and evaluates any litigation, claims, or assessment 4. Obtain Written Representation from Management that all litigation, asserted / unasserted claims, and assessment have been disclosed (Management Rep Letter)
51
Who is the primary source of information regarding legal contingencies?
Management
52
Legal Letter
An audit inquiry sent to the entity’s attorneys in order to obtain or corroborate information about litigation, claims and assessments
53
Important info about a legal letter:
-Auditors ask management to send a letter to in-house counsel (aka general counsel) and to each external attorney -Letter is prepared on Client’s letterhead
54
Refusal to provide information requested in legal letter is a
Limitation on scope
55
Important info included in the legal letter:
-List of pending or threated litigation for each asserted or unasserted claim to which counsel has devoted attention or in which an unfavorable outcome is reasonably possible Describe and evaluate each pending / threatened litigation: -Progress of the case -Client’s planned actions, -Likelihood of unfavorable outcome -Estimated range of possible losses (if estimable)
56
Subsequent Events
Events or transactions that occur after the balance sheet date but before the issuance of the financial statements that materially affect the financial statements
57
Type 1 Subsequent Event
Recognized Event New or better information that existed as of the Balance Sheet date becomes available DIRECT EFFECT on financial statements and REQUIRE ADJUSTMENT
58
Type 2 Subsequent Event
Unrecognized Event Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date These do not have direct effect on financial statements (as of YE) but may REQUIRE DISCLOSURE
59
When a subsequent event is recorded or disclosed in the financial statements after the auditor has obtained “sufficient appropriate evidence” but before the issuance of the financial statements, the auditor has two options:
Dual Date the report -original date of the report + date of subsequent event Change the Date of the Report to the date of the Subsequent Event -Auditor is then responsible for all subsequent events up to the new audit report date`
60
Subsequent Event Audit Procedures
Inquiry Read F/S Scanning Reviewing Documents Obtain Letter of Representation
61
Final Analytical Procedures
Auditors last chance to see the Forest. Is there anything unusual or significant that requires additional follow-up and testing
62
Management Representation Letter
Letter corroborates (confirms) oral representations made to the auditor by management or by other auditors and documents the continued appropriateness of such representations
63
Big purpose of management representation letter
Reduces the possibility of misunderstanding between auditor and client
64
What happens if misstatements are detected during the final evaluaiton of the audit?
Must consider in terms of materiality of their effect on the FS If likely misstatement > tolerable misstatement = adjustment required
65
Audit standards require the auditor to communicate certain matters related to the audit to
those responsible for governance (Typically Board of Directors and Audit Committee)
66
Relationship between Assurance, Attest, and Auditing
From specific to broad: Auditing --> Attestation --> Assurance
67
Assurance Services
Independent professional services that improve the quality of information, or its context, for DECISION MAKERS
68
Attestation Services
Are provided by a practitioner engaged to issue an examination, a review or an agreed-upon procedure report on a subject matter, or an assertion about subject matter, that is the responsibility of another party as measured against suitable and available criteria NOT JUST FINANCIAL MUST BE INDEPENDENT
69
Auditing
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
70
Different type of Attest Engagements:
Examination (assertion-based or direct) Review Agreed-upon Procedures
71
Examination (assertion-based or direct) Level of assurance, attestation risk, and type of report
High level of assurance Low Attestation Risk Opinion Report
72
Review Level of assurance, attestation risk, and type of report
Limited level assurance Moderate attestation risk Conclusion Report
73
Agreed-upon Procedures Level of assurance, attestation risk, and type of report
Variable level assurance Variable attestation risk Findings and Procedures report
74
Attestation risk
The risk that the practitioner expresses an inappropriate conclusion about a subject matter information is materially misstated.
75
Examination Engagements
CPA expresses an opinion that the subject matter is based on or in conformity with the criteria in all material respects or the assertion is presented (or fairly stated), in all material respects, based on the criteria
76
General use distribution =
report use is not restricted to specified parties (essentially anyone)
77
Limited use distribution =
reports use is limited to a certain audience For example….“This report is intended for use by only ABC company”
78
Must obtain sufficient evidence to support a LOW LEVEL of
attestation risk
79
Examination includes the following from the practitioner
-Plan the work and properly supervises other members of the engagement -Identifies and assesses the risk of material misstatement (RMM) whether due to fraud or error, based on an understanding of the subject matters, its measurement, the criteria and other circumstances -Obtains sufficient appropriate evidence
80
Limited assurance is also referred to as
Negative Assurance
81
Attestation Review
The performance of inquiry and analytical procedures to provide the accountant with a reasonable basis for expressing limited assurance that no material modifications should be made to the financial statements for them to conform to GAAP.
82
What does negative assurance mean
The subject matter is not in conformity with the criteria, in all material respects or that The assertion IS NOT fairly presented, in all material respects, based on the criteria
83
Agreed Upon Procedures
The CPA applies the procedures agreed upon by the specified parties and reports the results. Joe Friday "Just the facts man"
84
Practitioner’s report does not provide ... but simply finds ....
does not provide an opinion or a conclusion but simply reports the findings of the procedures that were applied
85
Preparation of financial statements services do not include what
Assurance, report issued, independence.
86
Compilation
CPA is engaged simply to assemble into financial statement format the financial records of a private company
87
Compilation is similar to preparation except
a compilation requires a report to be issued
88
Compilation is intended for .... and doesn't include
Intended for use by lenders and other outside parties No assurance, no independence (But must be disclosed)
89
How much assurance is needed for each of these services: Audit Review Compilation Preparation Bookkeeping
Audit = Reasonable Assurance Review = Moderate Assurance Preparation/compilation = no assurance
90
New York Stock Exchange (NYSE) requires ALL companies on its exchange to
have a viable internal audit function
91
Institute of Internal Auditors (or IIA)
The recognized authority, principal educator, and acknowledged leader in certification, research and technological guidance for Internal Audits worldwide
92
International Professional Practices Framework (or IPPF)
Framework that the Institute of Internal Auditors’ professional guidance is organized into
93
IPPF contains two categories of guidance:
Mandatory and recommended
94
Mandatory Guidance
Definition of Internal Auditing (we covered earlier) Core principles for the professional practice of internal auditing International standards (attribute and performance standards) Code of Ethics
95
Recommended Guidance
Implementation Guidance Supplemental Guidance
96
IA does not report to
the public or parties outside (ie. External) the company
97
“Co-sourced”
An entity hires a public accounting firm or other professional services firm to provide IA services in conjunction with its own internal auditors
98
To rely on the work already performed by IA, the external auditor must evaluate Internal audit’s
1. Objectivity 2. Competence 3. Discipline and systematic approach, including quality control. Work must be structured, organized, reviewed.
99
When should significant judgements be made?
During External Audit
100
Legal Letter parts:
1. Any asserted or unasserted claims 2. Intended Action 3. Estimated outcome

Audit (4 decks)

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