Acct 460 Exam 2

Occurrences – relates to whether all recorded transactions and events have occurred and pertain to the entity

Completeness – related to whether all transactions and events that occurred during the period have been recorded

Authorization – relates to whether all transactions have been properly authorized

Accuracy – addresses whether amounts and other data relating to recorded transactions have been recorded appropriately.

Cutoff – relates to whether transactions and events have been recorded in the correct accounting period.

Classification – concerned with whether transactions and events have been recorded in proper accounts.

Existence – addresses whether ending balances of assets, liabilities, and equity interests included in the financial statements actually exist at the date of financial statements.

Rights and obligations – address whether the entity holds or controls the rights to assets included on the financial statements, and that liabilities are the obligations of the entity.

Completeness – addresses whether all assets, liabilities, and equity interests that should have been included as ending balances on the financial statements have been included.

Valuation and allocation – addresses whether assets, liabilities, and equity interests included in the financial statements are at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

The assertions provide a road map for the auditor in determining what evidence to collect regarding various items. Also help guide the auditor in determine the audit procedures to collect the needed evidence.

Auditors identify high risk types of misstatements while planning the engagement

Each type of misstatement occurs because one or more management assertions have been violated

Auditors design procedures to gather evidence for testing those high risk assertions

Look at examples provided in table 5-3 on page 137

The risk of material misstatement and the quality of the audit evidence gathered influence the quantity.

The greater the risk results in more evidence needed, while the higher the quality results in less evidence needed.

The auditor only examins a sample of the transaction that composes the class of transactions or account balance

Due to nature of evidence, auditors must often rely on evidence that is not perfectly reliable

Independent source outside the entity

Effectiveness of internal control

Auditors direct personal knowledge

Documentary evidence

Original documents

Inspection of record or documents- examining internal or external records or documents that are in paper form, electronic form, or other media.

Inspection of tangible assets - consists of physical examination of the asset. Auditors usually inspects or counts a tangible asset.

Observation - consists of looking at a process or procedure being performed by others. Examples are observing of the counting of inventories, observation of performance of control activities.

Inquiry - Seeking information of knowledgeable persons (both financially and non financial) within the entity or outside the entity

Confirmation - represents audit evidence obtained by the auditor as a direct response to the auditor from a third party (the confirming party) in paper form or by electronic or other medium. Confirmations also are used to obtain audit evidence about the absence of certain conditions.

Recalculations - checking the mathematical accuracy of documents or records. Recalculations can be performed manually or through the use of information technology

Reperformance - involves the independent execution by the auditor of procedures or controls that were originally performed by company personnel.

Analytical procedures - consists of financial and

non-financial data. It is used to accomplish 3 purposes: Risk assessment procedures, substantitive analytical procedures, final analytical procedures

Scanning - review of accounting data to identify significant or unual items. this includes the searching for large and unusual items in the accounting records, as well as reviewing transaction data for indications or errors that have occured

(a) Created when the customer orders from EarthWear

(b) They CSO is entered into the revenue system to begin the process, and contain the details of the order.

CreditApproval Form

(a) When a customer purchases on credit

(b) The information in this form isused to judge a customers credit worthiness, and give them a credit limit

Open-OrderReport

(a) A report of all customer orders, where processing has not been completed

(b) Used to keep track of orders that still must be completed, viewed daily or weekly -

ShippingDocument

(a)Prepared anytime anytime goods are shipped to the customer

(b) Serves as a bill of lading, used to initiate the billing process

SalesInvoice

(a) Created when the order has been fulfilled and revenue can be recognized

(b) Used to bill the customer

SalesJournal

(a) When a sales voice is issued it is recorded into the sales journal

(b) This issued to keep track of all sales, including the specific details of all of the sales

CustomerStatement

(a) Usually mailed to the customer monthly

(b) Used to capture a detailed summary of all sales, cash receipts, and credit memorandum transactions processed through the customer’s account for the period

Accounts Receivable subsidiary ledger

(a) When a transaction is recorded in the sales journal and the cash receipts journal

(b) Contains details of transactions with each customer

Aged trial balance of accounts receivable (a)Prepared weekly or monthly

(b) Summarizes all accounts in the subsidiary ledger, reported in aging categories to monitor collection of receivables

Remittance advice

(a)Mailed with the customer’s bill and returned with the customer’s payment (b)Contains information on which invoice is being paid by the customer

Cash receipts journal

(a)Maintained throughout the revenue cycle (b)Records cash receipts

Credit memorandum

(a)Created when goods are returned (b)Records credits for the return of goods

Write-off authorization

(a) Either created in the normal stream of sales, or as a separately authorized transaction(b) Used to authorize the write off of an uncollectible account

Order entry

(a) Entry of new sales

(b) Customer sales order

Credit authorization

(a) Determines that the customer is able to pay for the goods or services

(b) Credit approval form

Shipping

(a) Authorizes the shipping of goods, or providing of services

(b) Shipping document

Billing

(a) All goods shipped and services provided are billed at authorized prices

(b) Shipping documents

Cash receipts

(a) Ensures that all cash collections are properly identified and promptly deposited intact into the bank

(b) Remittance advice

Accounts receivable

(a) Ensures that all billings, adjustments, and cash collections are properly recorded in customers A/r records

(b) Sales invoice,remittance advice, and credit memoranda

General ledger

(a) Ensure that all revenues, collections, and receivables are properly accumulated, classified, and summarized in the accounts

(b) All documents probably affect the general ledger

1.) Industry-related factors

2.) The complexity and contentiousness of revenue recognition issues

3.) The difficulty of auditing transactions and account balances

4.) Misstatements detected in prior audits

1.) Understand and document the revenue process based on a reliance strategy

2.) Plan and perform tests of controls on revenue transactions

3.) Set and document the control risk for therevenue process

1.) Volume of transactions or date

2.) The nature and complexity of the systems by which the entity processes and controls the information

3.) The nature of the available evidence, including audit evidence in electronic form

Recording revenue for inventory that was not shipped

-Occurrence; Record sales only with

approved customer order and shipping document-

Shipping inventory but not recording revenue -Completeness;Shipping documents matched to sales invoices

Shipping goods to a customer withan unacceptable credit rating

-Authorization;Proper procedure for authorizing credit, and shipping goods-

Recording revenue in the wrong accounting period

-Cutoff;All shipping documents forwarded to the billing function daily

1.) Substantive analytical procedures; used to examine plausible relationships among related accounts

2.) Tests of details of classes of transactions,account balances, and disclosures; concentrates on the detailed amounts ofestimates that make up the ending balance for revenue- related accounts

Occurrence for sales revenue

Completeness for sales revenue

(a) Items are missing from the accounts receivable ledger

(b) Review of monthly bank reconciliation

(a) Revenue earned in the next period is recorded in the current period, or revenue from the current period is pushed into the next reporting period

(b) Review shipping documents to see when revenue was actually earned and compare them tothe sales invoice for recording revenue

(a) Items in the accounts receivable ledger do not belong

(b) Send confirmations to the clients about the billings

(a) Items in the accounts receivable ledger are not owned by us, they have been factored out

(b) Sendc onfirmations to banks confirming that they have no obligations to our receivables, or check cash receipts for a cash inflow from factoring receivables

(a) Allowance for Doubtful accounts is estimated appropriately to report an accurate netrealizable value for accounts receivable

(b) Check what the allowance account estimate is for similar sized company in the same market. Calculate it yourself as well.

1.) The accounts receivable balance is immaterial

2.) External confirmations would be ineffective

3.) The auditors assessed level of risk of material misstatement at the relevant assertion level is low, and other planned substantive procedures address the assessed risk

Positive confirmation; requests that customers indicate whether they agree with the amount due stated in the confirmation

Negative confirmation; requests that a customer respond only when they disagree with the amount due to the client.

1.) The auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion

2.) The population of items subject to negative confirmation procedures comprises a large number of small, homogenous account balances, transactions, or conditions

3.) A very low exception rate is expected

4.) The auditor is not aware of circumstances or conditions that would cause recipients of negative confirmation requests to disregard such requests

-Positive confirmations

Must use alternative procedures to verify the amount owed

-Negative confirmations

Nothing, not responding indicates they agree with the amount owed

1.) Send second, or third confirmation requests

2.) Examination of specific subsequent cash receipts

3.) Examination of shipping documentation

4.) Examination of other client documentation

The auditor determines an aggregate misstatement, which is then compared to the tolerable misstatement. If the aggregate misstatement is smaller the auditor may accept the account as fairly presented.