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Audit 427Ch7&8
Yeah
| Question | Answer |
|---|---|
| What are the short-term effect and the long-term effect on the financial statements for improperly capitalizing expenditures? | Capitalizing expenses increases net income in the year when they should have been completely expensed. |
| What is a voucher? | A document that shows the accounts that are debited and indicates who checked the invoice for proper date, price, math, and reconciled voucher package. |
| How can purchashing managers use their position to defraud the company? | Because they can give business to vendors who do not give the best quality or price to the company. |
| What can be done to prevent it? | If the purchase or series of purchases exceed a certain dollar amount, require that they receive bids from several vendors and have bids get collected by someone else |
| Why is a "blind" purchase order used as a receiving report document? | A purchase order with all purchase information except the quantity, which is left blank for the receiving dpartment to fill in after inspection/count. |
| Where could an auditor look to find evidence of losses on purchase commitments? | Auditors can find evidence in the open purchase order file if market prices have fallen below the purchase price shown in purchase orders. |
| Where could an auditor look to find evidence of losses on unrecorded liabilities to vendors? | They can inspect the unmatched receiving report and the unmatched invoice file. |
| What primary functions should be separated in the acquisition and expenditure cycle? | Seperation of duties should include purchasing, reciving, and cash disbursement; more on pg 325 |
| What feature of the acquisition and expenditure control would be expected to prevent an employee's embezzling cash through creation of fictitious vouchers? | Use custody to prevent access to blank documents such as purchase orders, receiving reports, and checks. |
| How would substantive procedures for accounts payable be affected by a low risk of material misstatement? | CR down, DR up, SP down |
| How would substantive procedures for accounts payable be affected by a high risk of material misstatement? | CR up, DR down, SP up |
| Describe the purpose and give examples of audit procedures in the search for unrecorded liabilities. | The objective of the search is to search anywhere where evidence of liabilities could exist |
| In substantive procedures, why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of audits? | The emphasis is on completeness because financial statement users are more concerned if a company understates expenses and liabilities than if management overstates those accounts. |
| How do audit procedures for prepaid expenses and accrued liabilities also provide audit evidence about related expense accounts? | Because they are cross-referenced and used with analytical procedures for horizontal/vertical analysis. |
| What assertions found in PP&E, investments, and intangibles accounts are of interest to an auditor during the exam of the expenditure and acquisition cycle? | Rights, completeness, valuation, existence, presentation and disclosure (pg 332) |
| What items in a client's PP&E and depreciation schedule give auditors points of departure (assertions) for audit procedures? | Physical inspection and vouching --and inspecting documents [existence, valuation, rights, and obligations) |
| What four methods are used to audit other expense accounts? | Substantive tests of transactions (a sample), analytical procedures, examine them separately, or in conjunction with related assets and liabilities. |
| What do we mean by revenue recognition? | The recording of revenues in the entity's books |
| What does GAAP say about proper revenue recognition? | Revenue is recognized when it is realized (or realizable) and earned. |
| Why do you think companies use revenue recognition as a primary means for inflating profits? | To meet sales forecasts (resulting in higher EPS and better bonuses) |
| Why is revenue recognition riskier for a new company? | Because financial analysts often value them at a multiple of total revenues. |
| What is the basic sequence of activities and accounting in a revenue and collection cycle? | The basic activities: 1) receiving + processing customer orders (including credit approval), 2) delivering goods + services to customers, 3) billing customers and accounting for accounts receivable, and 4) collecting + depositing cash received from cust |
| What purpose is served by prenumbering sales orders, shipping documents, and sales invoices? | So the system can check the sequence and determine whether any transactions have not been recorded (completeness) or have been duplicated (occurrence). |
| What controls should be implemented to safeguard accounts receivable files? | Limited access, frequent backup, disaster recovery plans, and high security |
| What computer-based files might auditors examine to find evidence of unrecorded sales? | The Pending Order Master File which tests completeness. |
| What computer-based files might auditors examine to find evidence of inadequate credit checks? | The credit check files |
| What computer-based files might auditors examine to find evidence of incorrect product unit prices? | The Price List Master File |
| What account balances are included in a revenue and collection cycle? | Cash, A/R, Allowance for Bad Debts, Bad Debts Expense, Sales Revenue, Sales Returns & Allowances |
| What specific control procedures (in addition to separation of duties and responsibilities) should be in place and operating in internal controls governing revenue recognition and cash accounting? | List on page 280 |
| What is a walkthrough of a sales transaction? | It involves following a sale from the initial customer order through credit approval, billing, and delivery of goods to the entry in the sales journal, subsidiary A/R, and cash receipts journal. |
| How can the walkthrough work complement the use of an internal control questionnaire? | A walkthrough can be used to answer questions not on the questionnaire or to observe the accuracy of the responses. |
| What assertions are made about classes of transaction and events in the revenue and collection cycle? | Occurrence, Completeness, Accuracy, Cutoff, and Classification |
| What types of evidence-gathering procedures are typically performed in testing controls over the revenue and collection cycle? | Vouching (occurrence) and tracing (completeness) - more on pg 281 |
| What is dual-direction test of controls sampling? | It is when you select samples to obtain evidence about control over completeness is one direction and control over occurrence in the other direction. |
| Why is it important to emphasize the existence assertion when auditing accounts receivable? | Because companies and auditors have found themselves in malpractice lawsuits by issuing unqualified reports on financial statements that overstated assets and revenues. |
| Which audit procedures are usually the most useful for auditing the existence assertion? | Confirming a sample of accounts receivable and performing follow-up procedures (pg 283) |
| What analytical procedures might be informative regarding the existence assertion? | Comparisons of assets and revenue balances with recent history and comparison of account interrelationships. |
| Distinguish between positive and negative confirmations. Under what conditions would you expect each type of confirmation to be appropriate? | Positive; asks the client to respond if the info is accurate/inaccurate Negative; Asks the client to not respond if the amount is right |
| What are some justifications for not using confirmations of accounts receivable on a particular audit? | 1) Receivables are not material, 2) confirmations would be ineffective based on experience or knowledge, and 3) analytical procedures or other SP provide sufficient, competent evidence |
| What special care should be taken with regard to examining the sources of accounts receivable confirmation responses? | Auditors should follow up on electronic/phone responses and not accept confirmations that are not returned to the auditors directly |
| What alternative procedures should be applied to accounts that do not return confirmations? | Examine 1) subsequent cash receipts (most effective), 2) sales orders, invoices, and shipping documents, and 3) correspondence files for past due accounts |
| What procedures should be performed to determine the adequacy of the allowance for doubtful accounts? (in support of the valuation assertion) | Review subsequent cash receipts from customer, discuss unpaid accounts with the credit manager, and examine the credit files. |
| What are the goals of dual-direction testing regarding an audit of the accounts receivable and cash collection system? | To obtain evidence of the existence and gross amount (valuation) of customers' balances directly from the customer. |
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