SU 11: Evidence -- Sales- Receivables-Cash Cycle

Question 1

1.) Auditor reviewed delinquent customers’ credit ratings

Answer 1

a. C, valuation and allocation – considering delinquent accounts and credit ratings relates to the valuation of A/R

Question 2

2.) The auditor confirmed accounts receivable

Answer 2

a. D, Existence - Confirmation is the primary test of existence

Question 3

3.) The auditor tested sales transactions at year end to determine that they were recorded in proper period

Answer 3

a. F, Cutoff – Evaluating transactions for the recording in the proper accounting period at year end tests cutoff

Question 4

4.) The auditor accounted for the numerical sequence of sales orders

Answer 4

a. A, Completeness – Accounting for all documents in a sequence is a test of completeness

Question 5

5.) The auditor vouched the recorded A/R to shipping documents

Answer 5

a. D, Existence – Vouching is a primary test of existence

Question 6

6.) The auditor determined that A/R was presented on the BS as a current asset

Answer 6

a. E, Classification and Understandability – Considering the presentation of items on the balance sheet is a test of classification

Question 7

7.) The auditor aged the A/R

Answer 7

a. C, valuation and allocation – Again of A/R to consider collectability relates to the valuation assertion

Question 8

8.) The auditor inquired of management about possibility that receivables had been sold or factored

Answer 8

a. B, Rights and Obligations – The possibility of factoring receivables relates to ownership issues

Question 9

9.) The auditor reconciled the total receivables from the subsidiary ledger to the balance on the GL

Answer 9

a. A, Completeness – Reconciling the subsidiary ledger with the GL helps determine if transactions failed to be recorded

Question 10

10.) The auditor determined that a note was included describing any sales to related parties

Answer 10

a. E, Classification and Understandability – Disclosures in the notes to the f/s relate to the understandability assertion

Question 11

Audits of Cash will generally require

Answer 11

High level of assurance

Will generally use a test of balance approach

Question 12

Cash - R and O

Answer 12

Management asserts that cash reported on the balance sheet belongs to the client. Use bank confirmation

Question 13

Cash Valuation

Answer 13

Management assets cash is reported on balance sheet in correct amount - confirm with bank, compare confirm with reconciliation, examine interbank transfers schedule

Question 14

Cash - E and O

Answer 14

Management asserts balance sheet amounts actually exist. Confirm with bank, observe cash on hand count, examine certificates of deposit

Question 15

Cash - Cutoff and Completeness

Answer 15

Management asserts that all cash on balance sheet has been reported in appropriate period. Compare DIT to cutoff statement. Reconcile cutoff statement

Question 16

Cash - P and D

Answer 16

Management asserts cash is properly classified and and any pertinent information is disclosed

Question 17

Evidence related to AR

Answer 17

Common tool is confirmation both positive and negative

Question 18

Positive Confirmations are

Answer 18

Require response from customer indicating agreement or disagreement with amount indicated by client

Question 19

Positive Confirmations are used when

Answer 19

Relatively low number of accounts with relatively high balance
Acceptable detection risk is low
Customer may be unlikely to respond

Question 20

Negative confirmation are

Answer 20

requires response only when customer disagree with balance

Question 21

Negative confirmations are used when

Answer 21

relatively high number of accounts with relatively low balances

Question 22

AR - R and O

Answer 22

Company asserts that they are entitled the amounts reported in AR.
Examine loan agreements for A/R Financing
Examine BOD minutes
Inquire of management

Question 23

AR - Valuation

Answer 23

AR is reported at net realizable value
Confirm balances
Recalculate balances of allowance for uncollectible accounts

Question 24

AR-Cutoff & Completeness

Answer 24

Management asserts that all amounts resulting from sales on account are included in AR and are reported in the appropriate period
Compare shipping documents to recorded sales
Examine pre-numbered ship docs to invoices to make certain that all numbers are accounted for
Examine ship logs and ship docs at or near ye for proper cutoff

Question 25

AR - E and O

Answer 25

AR amounts exist and sales actually occurred Confirm AR Compare sales docs to invoices to determine goods shipped Compare deposits to dates receipts were recorded to verify absence of lapping

Question 26

AR - P and D

Answer 26

Management asserts that amounts reported as sales and AR properly classified and disclosed Examine loan agreements (pledging) BOD minutes for AR financing

Question 27

Inventory - R and O

Answer 27

Management asserts company owns inventory reported and that is has not been pledged.

Question 28

Inventory R and O - Testing

Answer 28

- Inquire about consignments and inventory pledged as security - Examine loan agreements - Examine purchase invoices to verify inventory is owned rather than consigned - Examine BOD minutes - inventory financing

Question 29

Inventory - Valuation

Answer 29

Inventory is properly reported using appropriate inventory valuation method

Question 30

Inventory Valuation - Testing

Answer 30

- Inquire about valuation method used - Compare amounts resulting from test counts to amounts reported on inventory schedule - Compare inventory cost to amounts on invoices - Compare totals on inventory schedules to amounts on balance sheet - Compare amounts from cost sheets to amounts for manufactured inventory - Observe counts of inventory to verify accuracy - Recalculate selected amounts and totals to on inventory schedules using cost and quantity - Examine cost sheets for proper handling of DM, DL, and application of OH

Question 31

Inventory - Completeness and Cutoff

Answer 31

All inventory is owned by the company and the inventory is reported in the proper period.

Question 32

Inventory Completeness and Cutoff - Testing

Answer 32

- Inquire of management as to inventories stored outside the entity - Confirm inventories held by consignee, warehouses - Compare amounts from test counts to inventory schedules - Compare totals of inventory schedules to amount reported on balance sheet

Question 33

Inventory - E andO

Answer 33

Management asserts that all inventory that is reported in the financial statements actually exists

Question 34

Inventory E and O - Testing

Answer 34

* Confirm inventories held by consignees, public warehouses, and others outside the entity * Observe the counting of inventory * Examine shipping documents for inventory in transit

Question 35

Inventory P and D

Answer 35

Management asserts that amounts reported as inventory in the financial statements are properly classified and any pertinent information has been adequately disclosed

Question 36

Inventory P and D - Testing

Answer 36

• Inquire of management if inventory is pledged as security for a loan • Examine loan agreements for indication of financing of inventory • Examine financial statements and disclosures to make certain that inventory is properly presented and components and inventory valuation method are properly disclosed • Examine minutes of directors meetings for indications of inventory financing